????A Greek default has already occurred in the eyes of investors, even though it technically hasn't happened yet. The market is now forcing European leaders to quickly decide how they want the rest of the sovereign debt crisis to play out. While the technical default of Greece -- inevitable as it is -- took around 18 months, similar defaults in other peripheral eurozone members will probably come much faster.

????A lack of leadership on the part of the core members of the eurozone, namely Germany, could very well bring a swift end to the common currency, setting off an economic meltdown that few would want to imagine. The time has now come for Europeans to either move much closer or break apart.

????Tomorrow is the deadline for owners of Greek debt to agree to a haircut on their debt by extending the repayment schedule out a few years. The plan required 90% of existing bondholders to sign on to the plan. But traders say that only 50% to 70% have signed on, complicating Greece's attempts to head off a default.

????The restructuring of Greek debt may still occur by the deadline, but the market seems to be fed up with all the dancing around. Even if Greece is able to convince debt holders to effectively take a large haircut on their debt, the country would still ultimately have to pay back, or refinance, 135 billion euro by 2020. To do that, Greece needs to take in more money than it spends – a lot more money.

????That will be a problem, considering that all the austerity cuts the government has been forced to make have decimated Greece's fragile economy. The country's GDP contracted 7.3% in the second quarter of the year, far worse than expected. The resulting decrease in tax revenue caused the country's budget deficit to widen to around 10% of GDP. Greece would need to run a primary surplus of around 5% of GDP to stabilize its debt burden at 180% of GDP by 2014 and would have to run almost a 9% primary surplus to reduce its debt to 90% by 2031, according to Citigroup.

????Running those kinds of surpluses is almost impossible for Greece given its economic outlook. So instead of waiting for Greece to miss a payment in the coming years, the market took matters into its own hands over the last few days. Credit default swaps on five-year Greek bonds this morning were trading at rates implying a nearly 100% chance of default by the government. French banks that hold Greek debt have seen their market values fall in the last few days, which imply a total loss on all their Greek debt holdings.

Panic selling

????Score one for the market. Unfortunately, the market has a habit of going overboard. Panic is spreading across trading desks at speeds not seen since the dark days of 2008. The European slow motion crisis has now moved into overdrive, threatening to take down banks, businesses, nations and the European common currency. This is the contagion the media has warned about for months – it is already here.

????While the technical Greek default isn't causing fireworks like the fall of Lehman Brothers in 2008, the flames are growing. To be sure, this crisis was never really all about Greece's current debt woes anyway. The amount it owed was always too small to move the needle, accounting for just 3% of eurozone's total debt load. The real trouble comes after the default, when Greece has to make a choice about whether it stays in the euro or it takes its chances and moves back to the drachma.

????Moving back to its former currency would allow Greek exports to be competitive again with its neighbors, especially those that cater to tourists. Across the Aegean in Turkey, GDP grew by 8.8% in the second quarter. There is no reason why Greece couldn't capture some of that tourist market if it returns to a cheap currency.

????But leaving the common currency would also lead to some nasty results. It would force Greece to raise cash to plug its budget shortfall and potentially pay yields that could run as high as 25% over German bonds, something that would probably be impossible. That would force Greece to make even larger cuts in government spending, further exacerbating its economic woes. The Greek banking system would almost certainly collapse in the changeover as the ECB would stop payments currently keeping them afloat. Without that cash infusion from the ECB, the Greek banks would be left with a massive funding gap equal to around 20% of their assets or 100 billion euros, according to an analysis by Citigroup.

????A run on the Greek banking sector would result bringing economic activity in the country to a grinding halt. Imported products would be in short supply, creating serious political and social unrest throughout the country. The ensuing collapse in the Greek banking system would send shockwaves throughout Europe. Goldman Sachs (GS) estimates that banks in the peripheral eurozone would be hit the hardest, resulting in 38 banks requiring between 30 billion and 92 billion euros. Citigroup (C) estimates that losses in Greece, Ireland, Portugal and Spain would trigger direct and indirect losses of $480 billion.

????By then, the ECB would need to make a hard decision. Would it wait for the politicians to get their act together or would it be the lender of last resort to all of Europe? The last time the euro debt crisis flared up earlier in the summer, threatening Italy's 1.9 trillion euro debt market, the ECB stepped in and started buying Italian and Spanish bonds. So far the purchases have been moderate, not enough to bring Italian bond yields down to where they were before the latest crisis. The ensuing melee will force the ECB to buy a massive amount of bonds to stabilize the market, tying the fate of the peripheral countries with that of the richer core members.

????This is, of course, what the core members were hoping to avoid all along. But if the euro is to survive it is clear that it needs to have a more unified economic policy. Much of the cost of this closer union will be borne by Germany, where the current government seems reluctant to take charge. That will need to change if it hopes to finally put a lid on this long-running sovereign debt crisis and move forward.