In Australia we think we’ve escaped the worst of the crunch and recession as we ride China’s booming coat tails to a new prosperity.

And in America it’s a similar situation, the economy is back (the first estimate of first-quarter growth on Friday will show annual growth above 3%), the markets eyed new 19-month highs overnight. The worst is over.

We and the Americans (and Asia) continue to ignore the slow unravelling of Greece, which one thoughtful UK commentator says is “Europe’s subprime crisis”.

Greece is a member of the eurozone and it’s three weeks from default, an event that has the potential to derail the global economic recovery, especially in Europe. The country’s financial black hole has to be stabilised, starting this week, otherwise the end result will be messy and could produce another credit crunch as banks call back money and stop lending, which is just starting to grow again.

And just as the subprime crisis in the US produced a contagion effect across the rest of the global financial system and economy (which everyone said wouldn’t happen), Greece could see pressure on Spain, Portugal, Ireland, Italy and then the UK in coming weeks. Does anyone seriously think that the global financial system can withstand the shock of a Greek default (unless managed by the ECB and EU and Greece itself), less than three years after the big crunch hit in August, 2007?

A Greek default would see banks refuse to extend any more credit to the likes of those countries (including the UK). The same banks that lend in Europe, lend in the US or into the US market. Remember the credit crunch started in Europe on August 8, 2007, then spread to the US that night and into Asia the next day. (It did not start in the US when Lehman Brothers collapsed in September, 2008).

In fact if Greece was a company, it would be on the verge of administration, so fraught is its current financial status of rising debt and interest bills, a major loan about to become due and declining or non-existent cash flows to at least repay the debt  (the holders are unlikely to agree to it being rolled over).

The yield on two-year Greek debt jumped to a high of 13.6%, before closing at 13.52%. In fact the yield on those two year securities jumped three percentage points (or 300 basis points) in trading overnight as investors sold to avoid what they saw as the looming possibility of default.

That’s the highest yield anywhere in the world for government debt and Greece is now considered to be a worse credit risk than Argentina and Venezuela, two of the least credit-worthy nations around.

Concern over sovereign credit risk also dragged down the euro and Greek bank stocks and pushed the cost of insuring Portugal’s debt to new highs, underlining concerns that it could be the next eurozone member to suffer a debt crisis.

It is now becoming clear that the financial aid package agreed to with the EC, ECB and IMF will not be enough, that Greece and its creditors will have to reach some sort of agreement to restructure the €273 billion of debt to lower the huge interest bill that is crippling the country’s ability to remain solvent.

That agreement and Greek’s acceptance of it last Thursday night, our time, had settled markets, but just for a day. Then the German government, from Chancellor Angela Merkel down, rattled confidence over the weekend and again yesterday with comments saying Greece would only get the money if it provided a credible plan for deep cuts in spending.

Merkel said Germany was close to agreeing to the Greek request for the money, but also said Athens had to show a readiness to enact new savings and put its economy back on a sustainable path.

Those and other German comments saw the price of Greek debt soar as investors worried about German involvement in the EC agreement on what Greece has to do to get up to €45 billion of financial aid before May 19, when an €8.5 billion Greek government loan is due. Many commentators have now realised that similar loan commitments to Greece will be needed in 2011 and 2012. The markets want to seen evidence of these as well.

And with Merkel’s government facing a tough election in the German state of Rhineland-North Westphalia on May 9 and voters firmly against aiding Greece, there’s growing fears the Germans will baulk at extending aid or that any agreement might be overturned in a legal challenge now under way.

And the problem for Europe is huge, not only the health and strength of the eurozone and the euro are at stake, but more importantly, the strength of the European financial system. The Financial Times‘ Alphaville blogsite revealed the following information of just who holds Greek government debt, courtesy of RBS Bank:

“We know which foreign banks have most exposure based on BIS data as at Q3: France has USD75b, Switzerland USD63b, Germany USD43b (all European banks USD252b), the US USD16b and Portugal USD10b!

“For these banks, a restructuring would be imminently preferable to Greece leaving the EUR, where the mother of all asset-liability currency mismatches would send the “new Drachma”, not to mention the real economy, into a dramatic tailspin.

“In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate seriously. But even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could have dire consequences for the eurozone and the region’s beleaguered banks, which hold most of Greece’s bonds.

“The milder option would spread out Greece’s payments to creditors, who would have to accept a decline in the present value of their investments — an option that is starting to look like the best of an array of bad choices.”

And the best assessment on Greece and Europe is also to be found in the FT in the weekly columns of associate editor Wolfgang Munchau. He wrote yesterday:

“This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone.

“What we are seeing here is Europe’s equivalent of the US subprime crisis. Unless we hear some implausibly good news from Athens by Friday, it will soon blow up.”