Southern European banks need most capital
The heavy lifting on sorting the eurozone's financial crisis happens this afternoon, and presumably into the night, after David Cameron and government heads from non-euro countries make their escape home.
One immediate question for them is whether to disclose as soon as tomorrow the detail of how the €110bn of new capital that EU finance ministers decided yesterday has to be raised by European banks will be distributed between individual banks - or whether to defer those market-sensitive announcements until the whole eurozone rescue package is nailed down.
Which would mean, barring disasters, that all the new firefighting initiatives would be displayed in a great splurge on Wednesday, after what is supposed to be the final definitive eurozone rescue summit.
The financial case for immediate disclosure of the bank fund-raisings is that there is uncertainty about which banks need what - and it would help investors' confidence for them to know which banks are seen as weakest.
Except for one thing. It is not yet clear who or what is going to provide the capital needed by banks in countries with the biggest debts - so premature disclosure, pending resolution of where the finance is coming from, could destabilise markets.
Let me explain.
It is the banks in Greece, Portugal, Spain and Italy which are seen by regulators as weakest, as needing to raise the most new capital as protection against potential future losses on loans to highly indebted eurozone governments.
The reason will be blindingly obvious to you: Greek banks have lent proportionately most to the Greek government; Spanish banks have lent proportionately most to Spain's government; Italian banks have lent most to Italy's government; and so on.
Since the new Europe-wide rule to strengthen banks is that they must - by the middle of 2012 - have a minimum of 9% capital on a Basel 2.5 basis relative to their risk-weighted assets, after allowing for the fall in the price of their holdings of the debts of over-indebted eurozone countries, by definition it is the banks in those over-indebted eurozone countries that emerge as weakest.
Which means that banks in southern European countries will have the most capital to raise.
By now you will have seen the paradox of this attempt to strengthen banks: the governments of these over-indebted countries don't have a lot - if any - spare cash to inject into their banks.
The Greek and Portuguese governments are already on life support provided by the eurozone's bailout funds and the IMF. So it would be absurd to expect their taxpayers to put extra capital into Greek and Portuguese banks: they will need money from the European Financial Stability Facility, the eurozone's main rescue fund, to recapitalise their banks.
It is widely believed that Spain too will have to tap the EFSF for the finance that needs to be put into its banks. And, I am told, Italy is on the cusp of needing EFSF help.
To digress for a second, French and German banks will also have to raise capital. But commercial investors may well be prepared to provide that capital. And if not, the backstop of French and German taxpayers is a credible source of funds (lucky taxpayers).
Here's the thing, if Greece, Portugal, Spain and Italy all have to tap the EFSF to strengthen their banks, the money left in this kitty will begin to look paltry in respect of all the medicinal things this fund is supposed to do.
The maths goes like this. After a recently approved expansion, the EFSF has €440bn to disburse. But €133bn of this has already been allocated to propping up Greece, Ireland and Portugal. And as I mentioned yesterday, yet more EFSF money may have to go to Greece to prevent it defaulting.
Turn away now
So right now there is just under €290bn left in the EFSF kitty. Which could go down to less than €250bn if Greece, Portugal, Spain and Italy draw on it to recapitalise their respective banks.
If you don't want to be scared, turn away now.
Italy needs to borrow €250bn next year just to refinance its existing debts that are coming due for repayment - and not including the new money it will need to borrow.
Or to put it another way, if Italy is shut out of markets - which is not impossible - then the EFSF in its current form will not have even enough money to tide Italy over, let alone keep alive any other eurozone governments that run into difficulties.
Which is why it is so vitally important, as I've been banging on about, for the resources of the EFSF to be massively increased.
And that is why the failure of eurozone governments, and Germany and France in particular, to agree on how to expand the EFSF is so troubling.
So as you can presumably now see, a full-scale eurozone financial crisis can't be averted by any individual initiative but requires a whole package of remedial measures, of which strengthening the banks and enlarging the bailout fund are the two most crucial.
Update 17.15: As far as I can gather from talking to officials, the timetable for sorting out this mess goes something like this.
The hope is that there will be some sort of statement today on the principles governments have agreed for expanding the firepower of the bailout fund - the European Financial Stability Facility - recapitalising/strengthening banks and reducing the debt burden on Greece.
Detailed technical work on the EFSF and Greek measures will follow in the next couple of days (the bank recap is sorted, but not yet formally announced, as you know).
The aim is then to agree the package on Wednesday, when there will be a meeting of European finance ministers, followed by a full European Council (attended by government heads of non-euro members, such as David Cameron) and finally a eurozone summit meeting, which may well run on to the early hours of Thursday.
The eurozone summit on Wednesday will in theory be one of the most important meetings in the history of the European Union, because it will demonstrate whether member govenments have the will and decision-making ability to sort out a financial crisis that threatens to tear the eurozone apart.
Greatest responsibility falls on the largest eurozone economy, Germany.
For all the technical niceties, the future of the eurozone hinges on what level of financial risk the German government is prepared to take in providing emergency credit to other eurozone governments that are struggling to borrow, or may struggle to borrow, in future.