This is serious language coming from Centre for Economics and Business Research (CEBR).  They basically have told Greece that if they don’t leave the European Monetary Union, drop the Euro as their currency and devalue the new Greek currency, they would not escape this “debt trap” as they referred to it.  First off, telling a country that default is their best option is very strong language for any experts to use when they are talking about a countries bonds.  Once this new currency is put into effect, they are calling for a immediate 15% devaluation to get Greece back on track.

They just underlines the dire situation in the Euro zone right now.  It looks like the contagion has spread to Spain as well.  Spain lost their “AAA” credit rating last week as well.  Now that this investment-grade status is gone, we will see investors start to hammer their debt as well by slowly driving up their interest rates they will need to pay to finance their debt.  Not too mention Portugal and Ireland are also in the cross-hairs of the bond vigilantes.

This does not bode well for the Euro, it is still near its lows and with news like this, it will most likely make more lows before it gains in value.  I am looking for the Euro Zone to prune its currency of the weakest countries if they intend to keep a Euro viable as a currency.

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight.

Analysis: Euro is on its last legs and if they don’t do something dramatic, we will be reading about maybe a country like Germany or France dropping out and they would be the last nail in the Euro’s coffin.

Investors are smelling blood on the water for the weaker European Union countries.   With Greece, Portugal, Ireland and Spain in the cross-hairs, it doesn’t look good.  Standard & Poors has been reviewing their debt situation and they have been downgrading accordingly.   In my, Greece has a large bond payment coming up and investors are skeptical they will be able to pay it back.   They are essentially paying credit card rates (10-15%+) for borrowing funds.  Germany’s Chancellor is correct that if the EU and IMF do not step in and support Greece, their failure will be the catalyst to bring the world economy down again.

European Central Bank and IMF officials are negotiating a three-year fiscal authority plan with Athens as a condition to release emergency loans to debt-stricken Greece.

“I think the handling of the Greece case shows that everyone knows we cannot allow the same situation with countries as with Lehman Brothers,” she told a news conference.

Earlier, IMF Managing Director Dominique Strauss-Kahn said it was impossible to give any details on what would be finally agreed with Greece until the talks with Athens were concluded. He declined to say how much aid could be released.

Analysis: This is the contagion and it is spreading.  We will see world markets sell-off and then U.S. government and corporate bonds will rise as investors will seek a safe haven…again.  This means that the U.S. dollar will rally hard and gold will spike and then stabilize.  Oil will most likely decline if these fears continue and that affects demand.