I don't know enough to attest to Mark Blyth's correctness, but his explanation of Eurozone debt-buck-passing was enlightening to me. I don't feel I really grok the situation yet, but the imagery in his final paragraph is compelling.
So the state put that ‘put’ on the taxpayer. But in a democracy there is only so much you can put on the taxpayer before they throw out the rascals and vote for someone that promises to put that ‘put’ elsewhere, and the only place left is back on the bondholders. So if the bondholders know that the haircut is coming, they can try and put the put back on the banks, but given the state of the bank’s balance sheets and overall business model (it’s bust – and its not coming back), that’s not going to happen. So bondholders have only one out. They pressure the EU, and the Germans in particular, by squeezing peripheral bonds to make sure that taxpayers there take the hit that they don’t want to. But this of course, has a limit. That limit is called Spain. When you put $750 billion in a bag and say ‘bailout funds’ that tells everyone how much you are really willing to lose. It’s a chunk of change and it will take care of Ireland and Greece. But if everyone is, metaphorically speaking, trying to get towards the door in case someone shouts ‘fire’ in the crowded theater, then there is no guarantee it will stop there as contagion mechanisms take hold. In which case Spain’s liabilities, dotted across the bond portfolios of major Eurozone banks, blow through the bag of cash and the limit is reached. When that limit is reached, the mother of all bank runs will begin and the endgame for not just the Euro, but also the EU, will enter its final act.
If I can attempt to summarize: bondholders and taxpayers (from various nations) are struggling over who is going to lose money on all this debt. Bondholders have better organization and knowledge, but taxpayers have armies. It's not yet clear who is going to win, but the "final act" is going to be ugly.