With bank share prices at low levels, the incentive is for banks to achieve their required ratios through deleveraging, i.e. through reducing lending. A credit crunch is a distinct possibility at a time when the region is already heading into a recession.
Cumulative fiscal tightening in Greece and Portugal over 2011 and 2012 is around 8 percentage points of GDP, while in France, Italy, and Spain cumulative fiscal tightening over those two years of between 3 ½ to 4 percentage points of GDP is expected. Fiscal tightening on this scale would constitute a significant headwind to growth at the best of times.