"As long as the music is playing, you've got to get up and dance. We're still dancing," former Citi chief executive Chuck Prince notoriously told the Financial Times as the global financial crisis began to unfold in July 2007. He lost his job a few weeks later, but the music still seems to be playing on the other side of the Atlantic. This time, it's the children's party game of passing the parcel. When the music stops, whoever is holding the parcel has to unwrap it. But in the eurozone, nobody wants the music to stop.

So what's in the parcel? In the case of Ireland's banks, a lot of distressed real estate assets. Some commercial and residential developments will recover as economic growth recovers. But real estate restructuring advisors say Irish banks also lent money to developers who had nothing more than planning permission for construction on farmland in rural Ireland. If the developer is bust and the demand for new property was an illusory bubble driven by excessive credit during the boom, recoveries on these loans will be negligible.

In which case, it is hard to justify the Irish government's decision to guarantee the senior debts of these banks if their asset base is so depleted. Or the decision of Ireland's eurozone partners to guarantee the Irish government's guarantees. Or the eurozone's decision to underwrite a Greek government debt burden that could take years or even decades of fiscal austerity to reduce to sustainable levels. Or the European Central Bank's agreement to underwrite the whole debt merry-go-round by buying sovereign debt from commercial banks as part of its Securities Markets Programme - a decision that now seems to trouble the conscience of Bundesbank president Axel Weber.

All these deals were struck because no one wants to be left holding the parcel. But why then did major European banks go through a stress-testing process in July 2010 that included peripheral eurozone sovereign default scenarios? Almost all banks in Europe - including the largest Greek banks - survived even under the worst-case scenario. Do we conclude that the results were a fiddle? Or are there fears about other systemically important holders of sovereign or government-guaranteed bank bonds, such as pension and insurance funds?

If so, a stress test of these institutions is urgently needed. Because the quickest way back to health for Europe's banks is a return to economic growth, which is elusive as long as sovereign balance sheets are groaning under their load. If European financial institutions can afford to swallow a carefully managed haircut on sovereign or government-guaranteed bank debt today to pay for an end to severe fiscal austerity tomorrow, this is one deal that would finally allow everyone to stop dancing and start recovering.

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