The markets were rocked overnight when news was released that Greek Prime Minister George Papandreou has announced a referendum on his country's latest bail out.
This means that in January Greece will decide if it wants to accept the European Union's bail out by putting it to a vote.
If they vote yes, then terms will continue as planned. But if they vote no, which is a possibility with the continuous rioting taking place daily, then Greece will most likely have to leave the Eurozone.
At that point they will have a formal default, telling all their creditors that they will get (close to) nothing, and then they will issue their own currency called the Drachma. This currency will be able to be printed at will and can be used to pay off the mountains of pension funds and government spending that the people in Greece so desperately want.
The cost of living in Greece will skyrocket as the value of the Drachma will be many times lower than the Euro. They will be, temporarily, shut out of the bond market. (Like someone in America who declares bankruptcy)
This is the correct things for Greece and the Eurozone to do. It is also the correct thing for Portugal and Ireland to do, but we will come to that soon when the spotlight moves to those countries.
In the meantime all eyes are now on Italy and their 10 year bond which has once again crossed over the 6% line that the European Central Bank has promised to defend.
While Greece owes 350 billion euros in government debt, Italy has 2.6 trillion outstanding. If their cost to borrow continues to rise alongside Portugal and Ireland, then things will escalate very rapidly.
It is widely considered that the 1 trillion euro leveraged bail out announced last week that I discussed in The European Bailout Part 1 is less than half of what will be needed under a best case scenario.
Keep your popcorn ready, the next 12 months should be very exciting.