LONDON (MarketWatch) — The imminent Greek default is now the only issue that matters to the financial markets. The country is running out of money to pay its bills. It can no longer borrow on the markets. It has missed the deficit-reduction targets in the bailout package, and unless the euro area’s political leaders can come up with a fresh rescue package it will soon have no choice but to renege on it debts.

The real question is what happens next. Will Portugal, Spain and then Italy face a run on their banks as people rush to get their money out? Will a series of European banks fail, starting a fresh credit crunch? No one really knows, but the signs are hardly encouraging. The pressure on other high-indebted nations once Greece goes down will be intense. So will the pressure on the banking system.

Investors must hope that Markozy — France's President Nicolas Sarkozy and German Chancellor Angela Merkel — will find a painless solution to the debt crisis. Reuters

The only force that can avert catastrophe is that strange double-headed beast known to bond traders as Markozy — the French President Nicolas Sarkozy and the German Chancellor Angela Merkel. Neither shows any signs of getting to grips with the scale of the challenge they face, nor have they done so at any point since this drama started 18 months ago. Anyone staying in the markets now is taking a massive gamble that they suddenly get their act together over the next few weeks. They are almost certainly going to be disappointed.

The Greek drama is hurtling towards a denouement — and probably not before time. Under the terms of the bailout package agreed with its European partners, it was due to receive another chunk of money next month. Whether it gets the cash or not depends on Greek Prime Minister George Papandreou coming up with a deal with the International Monetary Fund and the European Union that fudges the terms of the rescue package. If it can’t, it will default. Even if it does, the next round of cash, and the round after that, are just as delicately poised. The debate now is no longer about whether Greece defaults, but how and when.

That is a crisis, to be sure, but handled the right way it should be a manageable one. Greece’s entire outstanding government debt is 250 billion euros, according to High Frequency Economics. In the context of the global financial markets, that is a relatively trivial sum — slightly less than the market value of Apple. The European Central Bank could simply buy up all the debt, and put it on its own balance sheet, and gradually deal with the inevitable losses on the paper once the whole crisis had passed. No one thinks Apple going bust would cause the downfall of Western Civilization. There is no reason why Greece should either.

There’s a snag, however. Europe is stuck with two incompetent leaders. Markozy have neither the authority nor the imagination to cope with the scale of the challenge they face.

There are three key problems.

One, no one leveled with the electorates. The euro EURUSD, +0.17% was not sold as a debt union, and it was never explained to the Germans and the French and the Dutch that they would end up having to pay the debts of Greece, Italy or Spain. In the 18 months since this crisis started, politicians have been in denial all along. If the euro was to be a fiscal union, the leaders of the continent should have started arguing for that two decades ago, when monetary union was first being planned. It is too late to start building the political support for a rescue package now. Anything they come up with this month is simply going to get thrown out at the ballot box, either now, or in a few month’s time. If they try and sneak a fiscal union in through the back door, they will simply face a worse backlash later on.

Merkel + Sarkozy = 'Markozy'

Two, the mechanisms haven’t been created. There have been nearly two years to come up with a plan for what happens if Greece goes down. All that has been put in place is the European Financial Stability Fund, and even that isn’t fully operational yet. Nor does it have anything like the funding in place to deal with the scale of the emergency it is likely to confront. In Washington last weekend, there were briefings the EFSF would be increased to 2 trillion euros. But the money isn’t there yet. All anyone actually agreed to was to go home and have a think about a rescue plan. There is a big — not to say alarming — difference between that and actually having one. When Lehman went bust, there were governments and institutions with the authority to act. Those simply don’t exist for this crisis.

Three, the solutions don’t work anyway. Bailing out Greece is only a short-term fix. So is a 50% default on its debts. It will get it through a few weeks or months but then it will have to come back for more money. In the medium term Greece will need to exit the euro, along with Portugal, and perhaps Spain and Italy as well. Again, it needn’t be a catastrophe for anyone. If you can create a monetary union, you can take it apart again. But there is no sign of anyone planning for that. The debate hasn’t even begun — and won’t until it is too late. All the politicians can suggest is throwing good money after bad — and not even very much good money at that. It is hardly surprising neither their electorates nor the bond markets are convinced.

In reality, the Greek default is going to be ugly. Every kind of asset you can think of is going to get hit. With the possible exception of cash buried in the back garden, there will be no safe havens (and even then, make sure it is the right kind of cash). Equities will take the worst pain, but corporate bonds will slump, so will commodity prices, and emerging markets which are already getting caught up in the storm. Even gold will weaken. Only the dollar may strengthen as money flees for safety.

Maybe Markozy can come up with something at the last moment to stave off disaster. But do you really want your portfolio to be at the mercy of that remote possibility? The answer is certainly no.