Early this year, we summarised the possible threats to the global economy and included Greece as a possible point of rupture in the global economic fabric. While we have been increasingly right on that count if one follows the Credit Default Swap market the contagion fears has increasingly taken everybody by surprise.

Portugal, Spain and possibly other Baltic states are under increasing pressure to "prove" to the market that they can refinance their sovereign debt issuance, as well as service the outstanding interest payments.

Like in the early 1990s, there are whispers that "Anglo-Saxon" traders are keen to break up the euro. The birth of the Euro had been keenly contested in the 1990s, with an early attack on the pound and lira that led to England and Italy dropping out of the then exchange rate mechanism.

Later, the attacks on the franc-deutschemark rates were repelled only after much domestic displeasure, courtesy the unions incurred by then French President Jacques Chirac. In essence, politics and parts of global finance have often found themselves disagreeing at the core fundamentals of what makes an optimum currency area.

As per the original thesis by Robert Mundell in the early 1960s the criterion for a currency area includes: (i) wage flexibility across regions (ii) labour mobility (iii) fiscal transfer to reduce economic pain (iv) homogenous set of cultural practices.

Reckless spending

Yet rarely is much said about individual government's debt-fin-anced expenditure. And this is precisely where the Greek crises have emerged. For decades the Greek governments have spent recklessly, often enough for political-electoral gains. Currently, Greek deficit is in the order of 12.7 per cent of GDP. The EU rules stipulate a deficit of three per cent.

Predictably, the proverbial chickens have come home to roost. The markets have begun to price the cost of insuring the Greek debt at historic highs. One measure is the difference between the premium to buy protection (equivalently, insurance) in the credit default swap market for German bonds and Greek bonds. The spread between the cost of insuring these two bonds has risen to nearly four per cent. In the coming months, Athens will have to refinance over $70 billion (Dh257 billion) and the bond markets are not convinced that the Greek government would restrain its spending patterns and be able to pay back in time.

To make matters worse, the ratings agencies Moodys and others are likely to downgrade the debt issued by Greece. The result of this is that Greek debt no longer can be held as collateral in global markets and so the Greek banks that use Greek debt to facilitate liquidity are likely to suffer immensely.

Forbidden

Furthermore, a regulatory problem is that the EU's Stability and Growth Pact explicitly forbids any kind of direct monetary transfer to a local government part of the EU. So, it isn't possible for Germans to write a check for the Greeks or for Brussels (the EU headquarters) to do so.

Recently, there have been murmurs that the Chinese might buy Greek debt. However, such talk turned out to be market froth on which an afternoon trading sentiment skids.

There is increased chatter and possibility that the IMF might orchestrate a package with the explicit blessings of Jean-Claude Trichet. As the wit goes, the EU has outsourced bailout plans to the IMF. Whether this is schadenfreude speaking or not, the original EU goal of restraining government spending levels is increasingly suspect. And this further undermines the ability of the supranational power in Brussels to get respective capitals to take its fiscal commitments seriously.

The heart of the crises, however, is about the viability of the euro model. Furthermore, the pressure on local politics to appease local concerns read as greater spending financed by debt the rising incentive to actively question the euro model, and implicitly the euro is not lost on the currency markets either. The euro has lost over five per cent against the dollar this year.

And so as if in a Greek play disrespect to the gods of budgetary management has brought Europe to the precipice of ignominy.

The question remains if a financial tragedy is yet to unfold. Some are actively betting on it.

The columnist works for a major European investment bank in New York City. You can follow his tweets at: http://twitter.com/ks1729