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Jeremy Glaser is the markets editor with Morningstar US.

Recently I argued that Standard & Poor's (S&P) lower outlook on US sovereign debt was nothing more than a distraction from the real problems in Europe. Last week we saw further proof of an escalating euro debt crisis from another S&P downgrade of Greece's debt and a warning that further cuts were possible.

The downgrade was not all that surprising. Greece's debts are bigger than its ability to pay them back. Although the country is trying to push through severe austerity measures, there is significant pushback from citizens, making it hard for the most extreme reforms to happen. And given how anemic growth has been, hoping for greatly increased tax receipts to make up the difference seems like a pipe dream. The only plausible way for the crisis to end is through some sort of debt reorganisation, which is a nice way to say "default".

But debt reorganisation will be far from easy. The hope is that richer eurozone members (namely Germany) will bail out Greece by making up the gap between what Greece can afford to pay and what creditors are owed. But the political will to throw money at this problem is likely waning. Voters are sick of bailouts after being subjected to years of watching tax dollars go to prop up failing financial institutions. And politicians aren't going to gain a lot of favor by helping bail out a foreign country, even if they do share the same currency.

This lack of political will is more than just a short-term problem - it is a structural fact of the eurozone. When the monetary union was created, the hope was that it would be the beginning of a stronger political union that could create a reasonably unified fiscal policy to complement the common monetary policy. This didn't quite pan out. National governments did give up chunks of sovereignty to Brussels (the de facto capital of the European Union), but the creation of a United States of Europe remained a distant dream. So now there are a lot of hard decisions to be made, but there isn't a real organization that is able to make them. In many ways, the fate of the Greek economy rests with the generosity of the German people. But what happens if they decide enough is enough and they stop the intervention?

Suffice it to say, it won't be pretty. There is a very real chance that Greece would choose to leave the eurozone. In fact, if credible rumours begin to circulate that the government is seriously considering leaving the common currency, it will be hard for the country to not follow through. The whole point of leaving the euro would be to massively devalue Greek currency to make the debts more manageable. A consequence is that instead of letting their accounts devalue, holders of euro-denominated bank accounts in Greece might seek safety in a more stable country, such as France. The resulting bank runs that the rumour could spark might force Greece to stop capital outflows from the country and eliminate the country's eurozone membership if the residents and politicians like it or not.

Short of an exit from the eurozone, there is also the possibility of a negotiated default that would pay back current debt holders a small fraction of their debt's face value. This isn't a great outcome, and a default is still a default. I think there would be a number of knock-on effects from this event that could have a real impact on investors. Here are a few:

Contagion

Greece is not a large economic power nor a large market for most US firms, so its failure would not in and of itself make a big splash. The biggest threat is the pressure it will put on other struggling European economies. Ireland and Portugal have already received assistance, and a Greek default would shine a bright spotlight on those countries. The market would wonder if they were also on the verge of default, and the spiral of rumours that forced Greece to capitulate could overcome these two countries, as well. If the pressure reached Spain or even Italy, the consequences would be even worse. These are much larger economies, and their default would send shockwaves across the entire financial world.