Greece Just Got Greece'd

Standard and Poor's downgraded Greece once again on Monday, from a rating of B to CCC, CNNMoney reported.Greece now sits two ratings above "default."Last week, fellow ratings agency Moody's also downgraded the country, putting its chances of default at 50-50. The credit default swap (CDO) market is bit more bearish, factoring in a 73% chance of default.Despite near daily statements by European government officials, it seems more and more likely that the country simply won't be able to repay its debts.The danger in all of this lies in the risk it generates for the broader European banking system and by extension the banking system of the United States and the world.In a worst-case-scenario, Greece could default and trigger a series of financial calamities that would make 2008 look tame in comparison. In 2008, only private institutions were facing bankruptcy. If a sovereign nation defaults, the implications could be vast. Greece's debt is held by major banks all over Europe. Multiple major European banks could fail overnight.The world's financial system is increasingly intertwined. Major bank failures in Europe might trigger multiple major bank failures in the United States. What would happen then? Would the Federal Reserve be able to bailout American institutions yet again? Would the European Central Bank be willing to do the same? How would this affect the U.S. dollar and the euro?If the ECB and the Fed print even more money to paper over additional bank failures, it could doom the currencies. Or would another financial catastrophe be bullish for the currencies, as investors dump assets in favor of cash once again?Action ItemsBullish: Traders who believe that, despite the current outlook, European leaders will prevent Greece from defaulting might want to consider the following trades:

• Buy WisdomTree Dreyfus Euro (NYSE: EU) in a long play on the euro. If Greece's debt crisis is able to be resolved, the euro might benefit.
• Buy SPDR DB International Government Inflation Protected Bonds (NYSE: WIP) in a long play on European bonds. WIP is not completely based on European bonds, but provides significant exposure.

Bearish: Traders who believe that Greece's default is inevitable may consider taking positions in the following:

• ProShares UltraShort Euro (NYSE: EUO) is a short play on the euro. The euro could depreciate significantly if Greece defaults, as the ECB may have to print currency to prevent bank failures.
• SPDR Gold Trust (NYSE: GLD) is a long play on gold. If the euro currency comes under stress, gold may do well as a safe-haven.

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