A few months ago, Finland asked Greece to back up its debt with gold as collateral. The proposal was shouted down at the time, but there are still analysts who think the idea has real promise as a way to save the euro from its current crisis of confidence.

Rich Tullo of New York research firm Albert Fried & Co. recently noted that Greek bonds lost half their value between March 2010 and September 2011, while gold (GLD, quote) surged nearly 70%.

As a result, each Greek bond was now worth roughly one ounce of bullion. And with Greek gold reserves up a reported 34% since the start of the year, there is now a lot more precious metal in the vault to back up all that currently distressed paper.

Granted, this “exchange rate” only makes sense for countries whose debt has already been priced for disaster. Spain, for example, owes $800 billion and owns about $17 billion in gold, so a one-for-one swap would be impractical unless gold soars and Spanish bond markets tank.

But even offering to back each Spanish bond with a gram of gold provides a certain level of insurance and comfort to traders who might otherwise be unwilling to trust Madrid’s ability to repay its obligations.

Other countries could sell their gold to pay down their debt, Tullo says. This would create short-term problems for the gold market — Italy has close to 2,500 tons of the metal to work with — but the reward would be a somewhat more manageable sovereign debt burden.

But in concert, the major players of the euro zone have over 10,000 tons of bullion worth around $620 billion in their vaults.

That would not bail out Italy, but if it were used to back euro bonds at a leverage of one ounce to every $6,000 or so in debt, it would work — and the total failure of Italy is definitely the worst case scenario that the EU is contemplating right now.

Once again, the worse the credit situation in Europe looks, the higher gold prices can go. And the higher gold prices go, the more logic this kind of gold-backed bailout might have for Europe’s leaders.