A Guide to What Happens When Greece Defaults

What scares everyone about a possible Greek debt default is that it would cause a lot of other institutions -- even other nations -- to join Greece in default. Remember 2008 when AIG hit the fan? It's like that, only much, much, much bigger.

How likely is this to happen? The Magic 8 Ball and the markets say: Very. On Monday, Greek 1-year bonds were trading at 111 percent. Germany has already announced it is putting up as many financial moats and dikes as it can.

The nations and institutions holding the most Greek debt are:

1. Greek banks: $62.5 billion
2. European Central Bank: $40 billion
3. Germany: $22.6 billion
4. France: $14.96 billion
5. UK: $3.4 billion
6. Italy: $2.35 billion

Fed chief Ben Bernanke said U.S. banks won't lose much by Greece itself defaulting:

We have asked the banks to essentially do stress tests and ask, looking at all their positions, all their hedges, what would the effect on their capital be if -- if Greece defaulted. The answer is that the effects are very small.

It is true the U.S. government and banks don't have much direct exposure to Greek debt. Unfortunately, Fitch Ratings says as much as 50 percent of U.S. money market funds are tied up in commercial paper from European banks.

For example, Vanguard Prime, a $110.6 billion fund, has 21 percent of its holdings in European bank debt. In the past six months, Vanguard increased its European investment by 4 percent because it could get better returns in Europe. (Now we know why.)

The risk here isn't the direct impact but the fallout. Institutions that found themselves suddenly holding worthless bonds would suddenly get calls from their bondholders asking for money. Other dominoes would then follow.

So here's an itinerary for a trip we really don't want to take.

Start: The running of the banks »
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