Since the Greek debt crisis started in March 2010, market participants have been on tenterhooks as every effort by euro zone leaders to stop the crisis from spreading has so far proven futile. On Wednesday even Germany seemed to suffer as demand in an auction of 10-year German bunds was poor.

On Thursday, Fitch dealt another blow to hopes that contagion can be contained by downgrading Portugal's rating to "junk" status citing "high indebtedness across all sectors."

"Looking say 10 years ahead, the future of the euro zone is moderately easy to forecast, but to predict how it will get there is not," Andrew Smithers, founder of Smithers & Co and author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers" wrote in the report.

"The garlic belt must regain its competitive position against the butter belt either by the break-up of the zone or by extensive and prolonged relative deflation," he added.

Adjusting the real exchange rate will require big decreases in prices, incomes and nominal gross domestic product in Greece, Italy, Portugal and Spain in the absence of significant inflation in the other states of the euro zone, according to Smithers.

Unbearable Pain

This will increase these countries' debt/GDP ratios and with the exception of Spain this ratio in the garlic belt countries already exceeds 100 percent, he noted.

"We doubt whether the pain will prove bearable as it increases. If it doesn’t, a combination of default and redenomination is likely by some or even all the garlic belt countries. This may lead to the total demise of the zone," Smithers wrote.

Fears of a disintegration of the euro zone led some analysts to say that contagion was complete even before the weak German bond auction on Wednesday.

Matthew Lynn, an economist at Strategy Economics pointed out in a note at the end of October that Germany's debt to GDP ratio was higher than France's and Spain's and listed four scenarios that could endanger the country's status as a safe haven.

The first scenario is a recession, which would push its debt to GDP ratio higher, the second is a major German contribution to the euro zone's rescue fund, the European Financial Stability Facility (EFSF), the third would be a major bank recapitalization following the British model and the fourth would be a break-up of the euro zone, according to Lynn.

"The real risk, of course, is that none of these are isolated events. If one happens, there is more chance of two happening. If two happens, there is more chance of three…and so on," he wrote.