What losses for lenders to Irish banks?
There is, as I've written here many times, a powerful moral case for imposing some of the costs of rescuing Ireland on those banks and financial institutions which fuelled Irish banks' reckless lending binge by lending to them (see my post from September).
But there are also powerful practical arguments why to do so might turn a calamity into financial disaster, for Ireland and for the eurozone.
So, against that background, I am gripped by an article in today's Irish Times which says that the team from the IMF, ECB and EU, that is negotiating the detail of Ireland's 85bn euro rescue package, wants to impose write-downs on providers of both subordinated and senior debt to Irish banks.
Now depending on what this entails, it is explosive stuff.
Least controversial - and, according to my sources, a done deal - is that providers of so-called subordinated debt to Allied Irish Banks will be asked to write off a significant proportion of what they're owed. With most of that debt trading at close to 30 cents in the euro, it's clear that investors in these loans are braced for hideous losses.
There's almost as bleak a prospect for holders of Bank of Ireland's subordinated bonds, which are trading at between 40 cents and 50 cents in the euro.
So there will inevitably be a few billion euros of losses for one group of Irish banks' creditors.
But the picture for so-called senior lenders is altogether less clear, according to officials to whom I've spoken this morning.
There are two categories of senior debt: there are loans guaranteed by the Irish state, and there are loans that aren't guaranteed.
Now if providers of guaranteed loans to banks were asked to write down the value of what they're owed, that would be exactly the same thing as asking lenders to the Irish government to write down their loans: it would be a haircut on sovereign debt.
Which would, at a stroke, completely alter the perception of the value not only of Ireland's sovereign debt, but also that of all the eurozone's other financially stretched economies, from Greece, to Portugal, to Spain and so on.
Or to put it another way, it could significantly escalate the eurozone's financial crisis and would run counter to everything that European governments have so far said they're trying to achieve.
So the Irish government remains hopeful - if a bit less confident than it was - that the EU/IMF team will not demand that providers of guaranteed bank debt should incur losses.
What about the senior debt that hasn't been guaranteed by the Irish state? Well the arguments against demanding that providers of those loans agree to reduce what they're owed are partly that there are substantial legal hurdles and also that there could be serious contagion to the valuation of senior loans to other eurozone banks - which could seriously damage important banks in other countries.
But, I have to say, no one in a position to know has yet told me that the IMF/EU team won't try to impose some kind of burden sharing on providers of unguaranteed senior bank debt. Which means that there'll be an anxious 48 hours or so for holders of this debt, since we should know the essence of the bank rescue proposals for Ireland on Sunday.
All that said, even if formal write-downs aren't imposed on holders of different categories of bank and sovereign debt, it's as well to remember that the verdict of the market is that almost every category of loan to Ireland is worth less than face value - with discounts varying from 80% to 10%, depending on security and guarantees.
What does that mean in terms of potential shock to the global economic system?
Well total claims on Ireland by banks - that's the aggregate of their loans to Irish banks, companies, households and state - are just over £460bn.
Market prices for debt imply that no more than two-thirds and perhaps as little as half of that £460bn can be repaid over the longer term: with investors currently putting a price of 73 cents in the euro on 10 year loans to the Irish state, and 30 cents in the euro for subordinated loans to AIB, it's probably reasonable to assume that direct loans to Irish households (for example) are fundamentally worth somewhere between those two numbers.
This implies that global banks will have to swallow losses of between £150bn and £230bn on the credit they've provided to Ireland, either in formal write-downs over the coming days or through a pernicious process of bankruptcies and rescheduling over the coming months and years. And, by the way, those would only be the losses for banks: there would be additional pain for other financial institutions - money market funds, hedge funds, pension funds, insurers and so on - which have also lent to Ireland.
The market's valuation of Ireland's debts may be wrong of course. But it should be clear why a financial earthquake in an economy a tenth of the size of the UK's is reverberating from Asia to North America.