The Greek situation will be interesting to watch this weekend and next week. The Euro zone has a problem. Greece may default on their sovereign debt sometime in the near future.

The reason this is such a danger can be summed up in two words. Interest rates.

Investors demand a return on their investment and to be compensated for taking the risk of lending. If Greece were to default, the interest at which other European nations pay on their debt will increase as they roll over past debt and they issue new debt because once one nation defaults, investors are going to demand more for their risk in handing over assets to European governments.

If the current situation exists, Greece will default on their debt. This will increase the interest rates on new debt for Italy, Portugal, Ireland, and Spain as they are experiencing similar troubles but are in better financial shape. The increase in their budgets that are spent on debt servicing will probably push these nations into default, which will than push the big players France and Germany to the brink. Another economic domino scenario.

This however creates an interesting Catch 22. The mere act of bailing out Greece will create a moral hazard, where Italy, Portugal, Ireland, and Spain act less responsibly or have less urgency to clean up their mess and possibly create another crisis. If Greece got bailed out, why not us? So you have a very expensive proposition. One has to determine which is more expensive either way, not good.

United States

What does that have to do with the US. Well, there are about 7 states that have 35% of the US population that are teetering on financial collapse.

California, New Jersey, New York, Michigan, Florida, Illinois, and Ohio

They are experiencing similar problems to Greece and the other PIIG nations and like the PIIG nations they have no access to the printing presses. Very similar problem, they are headed to default, they are politically unable to make the cuts or increase the revenue to stabilize their economies, their workforce is above the national average in unemployment, and their core industries have taken the biggest hits this recession.

The US government faces a similar problem, if they fail to bail out the one (My bets are on California or New Jersey) that blows up first, the others go down when they try to roll over their debt and issue new debt as the interest rates they are charged are obscene. If they bail out the one that blows up first, they have to bail out the rest of them.

Lastly the banks and hedge funds

Oh and add to that mix a financial system that will short the countries through Credit Default Swaps and that there will be players out there who will have a tremendous benefit in bankrupting a country/state. The one thing to remember, like the mortgage situation, are the CDS actually backed up by anything or are they a Ponzi scheme cooked up by some institutions making the bet there will be a bailout and pocketing as much money as they possibly can. Seeing that these are insurance products without reserves, I'm guessing on the Ponzi scheme, which unregulated insurance, tends to always be.