For Europe's Banks, Pinch of Debt Crisis Intensifies LONDON - The pain facing European banks shows no signs of ending any time soon. After a strong rally in Europe's stock and bond markets in the first three months of the year, financial institutions are again gearing up for fallout from the economic instability caused by the sovereign debt crisis. Top of the list is Greece's potential exit from the euro currency. Earlier this year, that possibility seemed remote. Now, JPMorgan Chase analysts give the country a 50-50 chance of leaving the monetary union during the next 12 months. British bookmakers, which had been taking bets on Greece's potential exit, suspended betting last week after a surge of activity drastically cut the odds on the country calling it quits. Uncertainty continued on Tuesday, when Greek politicians said they would hold new elections after local political parties were unable to form a coalition government. The financial consequences of a Greek departure from the euro monetary union could be severe. In the short term, the country's exit, and the subsequent devaluation of the Greek currency, could cost European governments and banks a combined 400 billion euros ($512 billion), according to Nikolaos Panigirtzoglou of JPMorgan. The figure includes potentially writing down 240 billion euros of Greek debt currently held by the European Union and the International Monetary Fund, as well as 130 billion euros held by the central banks of individual euro zone countries. Europe's banks, most notably French institutions, also may have to take losses of up to a combined 25 billion euros on their exposure to Greek debt. The wider implications for European banks also do not look rosy. Bankers say trading activity, as well as appetite for mergers and acquisitions, has slowed in response to the uncertainty in the wider economy. Companies, many of which have built up large cash reserves in recent years, are wary of spending the money for fear that they will need it to offset a downturn in consumer spending. That is a sharp contrast from sentiment earlier in the year, when an influx of more than $1.3 trillion of short-term loans from the European Central Bank to local banks helped to reopen Europe's capital markets and reinvigorate the appetite for deals across the Continent. "The beginning of the year started off with a bang, but the optimism has definitely come to an end," said a leading banker at a large European firm, who commented on the condition of anonymity because he was not authorized to speak publicly. People are still looking to do deals, but they've become increasingly cautious. The lack of confidence may require policy makers to again prop up the market - including the possibility of a new round of cheap loans for European banks - if other funding options dry up. On Tuesday, Fitch Ratings said almost 40 percent of investors polled by the ratings agency now supported a new influx of cheap loans from the European Central Bank. Roughly one-quarter of the investors, which manage a combined $5.6 trillion of assets, also said they would not invest in European unsecured bank debt, a sign that firms" ability to raise new funds could be coming under strain. The funding issue is particularly stark for governments and banks in heavily indebted southern European countries like Spain and Italy. While current attention has focused on the political instability in Greece, analysts say other countries may soon feel the full glare of wary investors. In an effort to reduce their exposure, international investors have already sold a total of almost 300 billion euros of Spanish and Italian government debt since the second half of last year, according to estimates from JPMorgan. Foreign investors hold an additional 500 billion euros of Spanish and Italian bank and corporate bonds, which also may be offloaded if concerns grow that firms will not be able to pay their debts. The pain may come sooner rather than later. The ratings agency Moody's Investors Service downgraded 26 Italian banks on Monday, including the country's largest firms, UniCredit and Intesa Sanpaolo, because of a slowdown in the local economy and fears that banks will not be able to raise new capital. Moody's said the inability of banks to tap the markets for new capital could lead them to cut back on lending, which would hurt their profitability. "Italian banks are particularly vulnerable to adverse operating conditions," the ratings agency said in a statement. These risks are exacerbated by investor concerns over the sustainability of the Italian government's debt burden, which has contributed to the difficult wholesale funding conditions faced by Italian banks.