Where will the new capital come from?

Writing in Thursday’s Financial Times, Pimco chief executive and chief investment officer Mohamed El-Erian argues that Europe’s first order of business should be to recapitalize its banks.

It is hard to argue with this prescription.  With the finances of Greece, Portugal, Spain, and Italy in dire straits and banks across the continent up to their eyeballs in the sovereign debt of other countries, the question is how will the recapitalization be financed.

According to El-Erian:  “Where private funding is not forthcoming, which should now be the presumption for a growing number of banks, recapitalization must be imposed, in return for fundamental changes in the way financial institutions operate and burdens are shared.”

Swell, but with so many European sovereigns having difficulty borrowing it is hard to see where the money will come from for this recapitalization.  The only plausible sources seem to be the European Central Bank and the International Monetary Fund, neither of which has a clear mandate to act.