With the the debt load of the PIGS (Portugal, Italy, Greece and Spain) out of control, Europe is on the brink of financial catastrophe, writes Simon Johnson. He makes the point that the stronger European powers like Germany and France, the ones that can pay their debts, can call in the International Monetary Fund but they're unlikely to do so and in any case, the IMF might not have enough cash to back stop the PIGS (actually, it's PIIGs if you include Ireland). And the result may be a Depression.

Johnson writes: "The IMF cannot help in any meaningful way. And the stronger EU countries are not willing to help - in part because they want to be tough, but also because they do not have effective mechanisms for providing assistance-with-strings. Unconditional bailouts are simple - just send a check. Structuring a rescue package that will garner support among the German electorate - whose current and future taxes will be on the line - is considerably more complicated. The financial markets know all this and last week sharpened their swords. As we move into this week, expect more selling pressure across a wide range of European assets. As this pressure mounts, we'll see cracks appear also in the private sector. Significant banks and large hedge funds have been selling insurance against default by European sovereigns. As countries lose creditworthiness - and, under sufficient pressure, very few government credit ratings will hold up - these financial institutions will need to come up with cash to post increasing amounts of collateral against their derivative obligations (yes, the same credit default swaps that triggered the collapse last time) ... Another Lehman/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk. And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up."

Can the crisis be averted? AS Jack Ewing in the New York Times points out, the big structural weakness of the EU is that there is no strong central government to pull everything together. The European Council represents 27 national governments which is why European authorities over the weekend failed to offer realistic plans to help Greece out of its debt woes. Let's remember that the "spread" or difference between Greek bonds and German bonds is more than double. Translated into English, folks, that means that the Greeks have to spend twice as much to borrow money and this could put any hope of a recovery in doubt.

As reported in the Globe and Mail, Jim Reid, a strategist at Deutsche Bank in London has warned that "the same problems plaguing Portugal and Greece could be "dress rehearsal for what the U.S. and U.K. may face further down the road."

After all, North America, Britain and Japan are facing rising deficits and falling tax revenues. Watch this space, we could be headed for a double dip recession.