That game has reached its endpoint with the assault on sovereign debt of Italy a few weeks ago. The country saw the yields on its benchmark 10 year bonds spike above 7 per cent versus 5 per cent just a few months earlier. With Italy facing a roll of nearly 300bn euros in 2012 the situation has clearly become unsustainable as the country would face ruinous interest rate costs under the current conditions.
In a perfect world the Eurozone would quickly move to a Eurobond solution allowing member nations to mutualise the credit risk across the whole region. Such structure would put an end to the endless game of hunting the next weakest credit, but is unlikely to become policy anytime soon due to fierce resistance from northern Europe. Instead policymakers are trying to use a multifaceted approach that includes more aggressive intervention from the ECB, a mild leveraging of the EFSF and the prospect of using the Fed along with 17 central banks from Europe to create a lending consortium that would provide the IMF a triple-digit billion loan that would be used to create a special fund to help finance troubled credits in the Eurozone region.
It appears that authorities across both sides of the Atlantic are coming to the conclusion that the central-banks-to-IMF scheme is the most expeditious policy response to the sovereign debt problem as it neatly sidesteps many political barriers by providing much needed capital without obtaining legislative approval. If this approach pacifies the markets, the relief rally in euro-dollar could send it back above $1.3500 as credit pressures ease.