LONDON Fears a capital black hole is spreading over the euro zone's banking sector threatens to overshadow the first meeting in 2012 of German Chancellor Angela Merkel and French President Nicolas Sarkozy next week to discuss the region's debt crisis.
European banks technically have until January 20 to say how they will raise the estimated 115 billion euro ($147.12 billion)of capital needed by the end of June to repair balance sheets devastated by the euro zone's sovereign debt crisis.
But investors' nerves have become frayed after seeing Italian bank UniCredit (CRDI.MI) forced to deeply discount a planned one-for-one equity rights issue, and calls for more details on how others plan to raise funds are set to grow.
"The banks have to show their cards," said money manager Jeffrey Sica, president and chief investment officer of SICA Wealth Management, who adds the lack transparency about the capital raising plans is driving fund flows away from Europe.
The impact of banks' capital raisings will be widespread as they will likely look to fill shortfalls through rights issues, shrinking loans to customers, selling assets or cutting dividends or pay for staff. But national governments may also have to bail out any lender unable to find the cash.
"I anticipate, as things become more transparent to investors, and the more we hear about bank capital needs, we're going to keep seeing money move out of European debt and into other assets," Sica said.
In a sign of the growing nervousness about the health of the financial sector, the banks themselves have been depositing record amounts of money with the European Central Bank (ECB) rather than lend it to each other at higher interest rates.
Data on Friday showed commercial bank deposits at the ECB had hit a record 455 billion euros.
In a bid to ease the pressure on banks last month the ECB pumped almost half a trillion euros of cheap three-year money into Europe's banking system.
Merkel and Sarkozy's working lunch in Berlin on Monday is expected to focus largely on strategy for the upcoming European Union leaders gathering on January 30, with little prospect of any major news seen and any reaction likely to be short lived.
"While it may give temporary relief to the markets, there's still going to be this gorilla in the room: what are we going to do with all the debt maturities and how are we going to deal with the problem of the banks?," Sica said.
The mood among fund managers is not helped by the fact the key benchmark MSCI AC World index .MIWD00000PUS fell by 9.2 percent in 2011, the weakest year since 2008.
DEBT CONCERNS TO PERSIST
Another big event for markets in Europe will the bond auctions by Spain and Italy on Thursday and Friday. These will be real tests of market willingness to trust euro zone governments ahead of large raft of funding planned for the rest of the first quarter.
"Funding costs for sovereigns and spread levels are going to be a big focus, especially with Italian 10-year bond yields above 7 percent again," said Ken Wattret, chief euro zone market economist at BNP Paribas.
The ongoing negotiation over private sector involvement in the 130 billion euro second Greek debt restructuring plan is also likely to influence sentiment is the sovereign debt market.
Athanasios Orphanides, an ECB governing council member, has called on euro zone leaders to drop plans to impose losses on Greece's private creditors as part of the Greek bailout plan.
He said this would "help restore trust" in the euro zone and, while raising the financing costs for the Greek government, would lower costs for other governments in the currency union.
On Thursday the ECB policymakers gather for their monthly meeting where prospects of any easing in rates is seen as unlikely despite fear the region is heading into a recession.
"The chances of a move at next week's policy meeting have diminished, in large part because activity data for the euro zone as a whole have not been as bad as we had feared," said Wattret of BNP Paribas.
A Reuters poll of 66 economists found most expect the ECB will cut interest rates to a new record low of 0.75 percent in February or March from the current level of 1 percent.
The euro zone's economy deepened its downturn at the end of 2011 as retail sales fell and sentiment soured, but some improvement in the business climate has offered hope that an expected recession may be mild.
Data from the region due next week includes November industrial output for the euro zone, including Germany and France, and the UK.
The U.S. will publish December retail sales numbers and the Federal Reserve will release its Beige Book survey.
China is also scheduled to report a slew of economic data for December over the next fortnight, including trade, money supply and loan growth that could give investors more clarity on the slowdown in the world's second-largest economy.
Fourth quarter U.S. corporate earnings season kicks off after stock markets close on Monday, with Alcoa set to report. But the bulk of announcements come toward the end of the month.
(By Richard Hubbard; editing by Ron Askew)