Is Euro heading for a breakup because of Grecian bad apple?

Since the summer of 2009, we had seen a roaring recovery to the global economy. It is not just limited to the financial sector, but also to manufacturing and trade of most countries in general. Lately, the economic indicators have been pointing up, coupled with low inflation in the US. Due to high unemployment, the "Fed" has opted to keep interest rates low for "an extended" period.

If there were anything that could derail this recovery, it would be "Sovereign Defaults". Yes, since January 2010, Greece's rating has been cut, and the government is scrambling to rescue the country from going to default. In the past few days, Greece's problems have become the Euro bloc's crisis since the inception of the Euro. It has spread fast to the other PIIGS countries in Europe. Greece has been cut to junk status, while Portugal and Spain's ratings have been lowered as well this week. Interestingly, Greek bond yields are reaching unheard of levels, and CDS of the affected countries are shooting up.

It is hard to predict whether Greece will opt to stay in Euro or stick to its former currency, the "drachma". If they were to revert back to drachma, then Athens could devalue its currency to revive its economy. However, most of Greek's debt are denominated in Euro, making them expensive to payback.

Essentially, the PIIGS countries share a similar characteristic, and that is the crux of the problem here. They all have high debt-to-GDP ratios, well in excess of 70%. Also, these governments share high fiscal deficits that are not easily reduced unless massive government spendings are cut. If government deficits are cut to Euro mandated levels, Greeks will take their anger to the streets because they have been dependent on the generosity of their government for years. It is easy to spend, but much harder to tighten the belt; precisely the present situation nowadays.

Greece is not the sole focus of the contagion now since Angela Merkel, IMF and ECB are racing against time to rescue the Euro. For the very first time, the legitimacy and reputation of the "Euro" have been called into serious question. The problem should not have festered if Germany had acted decisively in resolving the problem 3 months ago. Since IMF has been courted to help resolve the problem, a lot of arm-twisting will no doubt ensue. Solutions are plenty, but not one is palatable to the Europeans.

It will be interesting to follow the saga that is coming from Europe because it has potential to infect smaller countries around the globe which share the same characteristic as Greece. A decisive and no-nonsense leadership is what the markets need to hear before the concerns become full-blown.