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The deadline Europe cannot afford to miss

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Image caption Will this meeting be the one to stabilise the eurozone?

It's a self-appointed deadline the eurozone can't afford to miss.

By the early hours of Thursday, we may finally discover how much firepower has been amassed to try and blast away the debt turmoil steadily spreading from Europe's financially wayward periphery to its core.

At 18.00 local time in Brussels, all 27 leaders begin their crucial and once-delayed summit.

Afterwards comes a working dinner for the leaders of the 17 euro-using countries that have to share the rescue bill. Then the talking goes on until the final documents can be agreed.

Whatever is decided and disclosed at the concluding news conference, the EU leaders won't have long to wait to see how it all goes down in the rest of the world.

Just a few hours later, the Asian, European and US markets will open in turn and deliver their verdict.

Hitch

And right until the 11th hour, things weren't quite going according to plan.

The Polish Presidency suddenly announced the postponement of an EU finance ministers meeting, scheduled for just prior to the event.

Those involved downplayed the significance of the change. But this didn't stop many observers wondering if key political decisions could not be reached - or were being batted on to the heads of government to decide among themselves.

Either way, few expect the final package will quite be the "big bazooka" demanded by the British Prime Minister David Cameron.

Yet the nature of the deal that's finally agreed will show whether the partners - and Germany in particular - have the will and capability to hold the currency zone together.

We are about to witness what may go down in history as one of the most significant meetings in EU history.

Of all the myriad issues that need fixing. the financial world expects clear responses on three crucial issues - arranged here in order of difficulty for the summiteers.

1: Beef up the rescue fund to protect Italy and Spain

Europe desperately needs to stabilise the Spanish and Italian debt markets to convince investors their holdings are safe.

That's because Italy accounts for 25% of European debt, Spain 9%. That's compared to 7% for Greece, Ireland and Portugal combined.

The main bailout fund seems likely to be boosted from 440bn euros to "beyond one trillion euros", according to a briefing in the Bundestag by German Chancellor Angela Merkel.

Yet even that one trillion figure remains well short of the firepower the market has repeatedly said may be needed.

What's more, that magic figure may only be reached through the creation of a kind of insurance scheme. Pre-summit papers circulating in Brussels suggest the 440bn euros European Financial Stability Facility (EFSF) will be set up to guarantee some of the face value of bonds issued by the likes of Italy and Spain.

Some European partners led by France would have far preferred the EFSF to be given a banking licence so it could tap the resources of the ECB - the only institution capable of creating money.

But Germany was implacably opposed to the idea. Such "leveraging" of the fund would also have been a breach of existing EU law.

2: Reduce Greece's Debt Mountain

The eurozone may finally push Greece's lenders to take as much a a 60% cut in the face value of their loans.

The latest report from the Troika ( EU Commission, the IMF and the ECB) suggested Greek debt could be brought down to just above 120% of GDP by the end of 2020 if a 50% loan discount was applied.

On the eve of the event, banks and bondholders were still resisting a "haircut" on that scale.

They argue more than a 40% cut would likely trigger costly insurance claims and could, in turn, tip Italian and Spanish debt markets over the edge.

Everyone is desperate to avoid a so called "credit event" or series of disorderly defaults where market developments like bond yields, credit ratings and the cost of loan insurance runs out of control.

3: Recapitalise Vulnerable Banks

This summit isn't just about saving countries that cannot service their debts.

It is also about shoring up the banks that lent to those countries.

The costly emergency rescue of Dexia has concentrated minds here. The larger the "haircut" imposed on European banks holding distressed sovereign debts, the greater the buffer those banks may need to stay afloat.

A figure of 100bn euros has already been agreed. Where possible, the cash will be sought from commercial lenders.

But as long as high anxiety persists in the debt markets, national governments and the EFSF bailout fund may have to come up with the lion's share.

Image caption European leaders have been meeting to find a solution to the crisis for more than a year

The IMF and some leading US banks are among those in the markets who believe the real requirement may be up to three times as much.

This is an emergency financial summit, but it may also be seen as a turning point for the EU itself.

On Thursday, the 17 eurozone members are expected to make a start on mutual budget monitoring and integration - to prevent any repetition of the current fiasco.

Whether or not this requires a tricky EU treaty change, such centralisation will inevitably widen the gap between euro and non-euro members.

The UK has already said it will not tolerate being locked out of key financial decisions made by the 17 eurozone countries.

There is a worry that summit decisions could set in motion a process that sends the single market into reverse.

It was the German finance minister who warned that this summit would be far from presenting a miracle cure.

The world can only watch and wait and hope that this time the eurozone finally manages to take three small steps towards recovery.

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