At the heart of the Thursday deal to stabilize the Continent’s financial system is a capital demand on the EU’s weakest banks. This has led some to criticize the deal on grounds that affected banks can only raise capital by deleveraging, weakening their home-country economies at a most inopportune time. This would be a real danger if the EU capital hike were a real demand for real money. But, while the new capital plan is better than the old one, it’s still a shell game in which weak European banks get to hide sky-high leverage behind complex risk-weightings and regulatory fiddles. Given past EU practice, this is old news. Now, though, does it threaten what’s left of the global agreement on the more robust Basel III framework?

If it does, it won’t be all bad. We’ve suggested in the past that the U.S. is sacrificing tough standards here based on unique U.S. requirements – most notably the end to too big to fail – in pursuit of a global “level playing field.” But, the field was already sloping in a dangerously downward direction before the EU crisis, the result of active dissent to key parts of Basel by the EU and the usual passive-aggressive stance from other nations that sign on to Basel in theory only to ignore it in practice. And, over the course of the summer, a major part of Basel III – the sustained zero risk judgment for sovereign debt – went from questionable to laughable.

A lengthy late-night document from the European Banking Authority (EBA) tries to keep Basel II in place to the greatest degree possible while crafting a new standard that passes the sovereign-weighting laugh test. Still, the details of the EBA statement demonstrate that, despite changes to the new sovereign risk weightings, the EBA did as little as it could to revise Basel II. To be sure, it took the “filter” out for sovereigns held in a bank’s trading book, but that’s not where most banks hold much of this stuff. For the banking book – where the real portfolios are housed – the EBA’s latest stand principally requires banks to write-down holdings to the fair value EBA thinks best. For Greek debt, this is likely to be the fifty percent hit agreed upon at the same EU marathon, but other write-downs are uncertain. Early signals from the EBA suggest it will be very, very gentle.  Press reports have largely missed the sovereign-debt issue, instead focusing on what EBA wanted them to highlight: the nine percent “quality” capital standard Eurozone banks would need to meet. However, the new nine-percent capital “standard” isn’t any more robust than the sovereign valuations on which capitalization will be judged. Capital in the EBA test is capital as defined under Basel II – precisely the definition corrected in Basel III because the old definition was so weak that tangible equity was in very, very scarce supply even at banks that, like Dexia, passed the EBA’s old stress tests with flying colors. The new stress test is a bit more stringent because it aims at a higher number with somewhat stronger judgments about sovereign risk, but that isn’t to say it’s in any way stringent.

And, even if the EBA standard bites – which it does to the tune of $148 billion for the Eurozone’s weakest banks – the bite may well be transitory. In conjunction with the capital plan, the EU crafted a new approach to its rescue fund that includes (it hopes) sweeping new guarantees both for bank debt and sovereign obligations. Once the guarantee is in place, the EBA tests will go back to the zero risk weightings accorded the sovereign holdings now scratched up a bit in the Thursday announcement. If the guarantees can be put in place fast enough, banks might not even need to raise capital because their holdings will be blessed by the magic hand of EU state capitalism – please, don’t say bail-out – and the EU’s financial system will be declared stabilized yet again.

This sets an interesting stage for the G-20. Today, EU officials signaled that they will tell their heads of state to push the U.S. to implement Basel II even as these same nations tell the U.K. no (and then some) in response to that nation’s call for a stringent Basel III accord in the European Union. The EU seems to like Basel II as it was and as it will quickly soon be again. Where this leaves Basel III is at best uncertain. If the U.S. sticks to its promise and stands by Basel III – not to mention the G-SIB surcharges now piled atop it – we may well sign on to a transatlantic accord between just the U.S. and U.K., not the global promise on which Basel III was premised.