Up until now, Greece has remained afloat due to the belief that the rest of Europe would bail them out. That belief took a body blow yesterday when the ECB said it wouldn't change the rules for Greece.
Because of this, the Euro tumbled today, while yields soared for Greek debt.
However, the real shocker for the market was the revalation that Greece was "looking at everything" in order to meet its borrowing needs. This indicated that it wouldn't be able to afford the higher interest rates in the not too distant future.
Increasingly the markets are viewing Greece as in a cul-de-sac, with no way out but eventual default. The question is what will this mean to the Euro?
The anti-bailout stance was reiterated last week when ECB executive board member Juergen Stark, a German deficit hawk, bluntly stated that markets were deluded if they thought other member countries would reach for their wallets to save Greece.
If the excessive deficit remains uncorrected, the EU could also punish Greece by forcing it to make a huge, nonrefundable deposit with the European Commission. But that would only reduce market confidence and multiply Greece's economic troubles.
Neither kicking Greece out of the EU or a fine makes economic sense. But letting Greece flaunt the rules could do irreparable harm to the credibility of the euro as a sustainable currency.
Olli Rehn, the newly installed European commissioner for economic and monetary affairs, expressed fears of a potential "spillover effect for the entire euro area" during his European parliamentary confirmation hearing.
Former IMF and Wall Street analyst Desmond Lachman, however, was much more pessimistic when he raised the idea of Greece defaulting in a piece for Financial Times last week.
"Much like Argentina a decade ago, Greece is approaching the final stages of its currency arrangement," he predicted, adding that "after much official money is thrown its way, Greece's euro membership will end with a bang."