The melodrama that unfolded as Greece sought a way to restructure its massive foreign debt is likely to be the opening act of a wider spectacle as other European nations — similarly burdened with national debt they cannot service — look for ways to avoid default.

The Greece debt crisis may be just the first act. Said Greece’s prime minister, George Papandreou, in a speech on March 8: “An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”

The risk premium on Greece’s national debt may be tempting for your more risk-tolerant clients. Greece’s bonds’ interest rates, illustrated by the 6.34% that investors demand for a 10-year state bond, are more than double the 3.1% long-term rates on Germany’s sovereigns, known as “bunds.” That high borrowing cost for Greece is a signal that all is not well in the land of Socrates.

In a sale in early March, international bond investors took a chance on Greece’s bonds, betting that the nation would not fail to pay interest and repay principal on time. However, if an investor buys bond insurance — about 300 basis points, depending on the state of fear or cynicism — the bonds are not necessarily a good deal. The risk premium, which would have to be paid via credit-default swaps to a CDS insurer, reflects the dubious finances of the country.

Greece’s bonds are already close to the brink of ineligibility as collateral for loans from the European Central Bank, according to bond raters. Of the big three bond rating agencies — Fitch Ratings Ltd., Moody’s Investors Service Inc. and Standard & Poor’s Corp. — only Moody’s still gives Greece’s national debt an A rating.

Moody’s could fall in line with its competitors and drop the bonds’ rating to Baa1, equivalent to BBB at Fitch and S&P. If that were to happen, then ECB rules, which require at least one A rating for bonds posted as collateral, would sever Greece’s credit lines. The private sector would follow, cutting credit lines; hedge funds would swiftly follow, driving down prices of affected bonds.

If Greece’s bonds were to fall into “sovereign junk” territory, the country’s borrowing costs would soar, many institutions’ mandates would forbid the purchase of Greece’s bonds and default would be all that much closer.

Greece could be an appetizer for the banquet of woe that Europe’s debt-ridden nations may serve up. “It points out the vulnerability of the European Union and its process of dealing with members that need to apply fiscal restraint,” says Randy LeClair, chief investment officer with Portland Investment Counsel Inc. in Burlington, Ont. “It is like the subprime situation in the U.S. As [the EU’s situation] evolves, the problem has the ability to topple the finances of larger EU members.”

Hanging in the balance are the public debts of other European countries with high ratios of debt to gross domestic product. These include Greece’s co-members of the “PIIGS” countries: Portugal, Italy, Ireland and Spain.

Two other European countries not on the euro — Iceland and Britain — are also in trouble. Iceland is in default on commitments to rescue depositors in its Icesave thrift funds, which had operated in Britain. Meanwhile, Britain itself is under siege as funds flow out of British accounts to the U.S. (Although the U.S. is also saddled with huge debts, there is no doubt that it will make good on every bond it has issued.)

Meanwhile, Ed Altman, professor of finance at New York University and a leading authority on high-yield debt, suggested in a speech he delivered in early March that Greece will need another rescue package. Ultimately, he predicts, the nation will run out of saviours: “Greece will default and it will lead to some systemic problems in other countries — Spain, Italy and Portugal — and it could even spread to Britain.”

The fundamental problem is that advanced economies are already heavily indebted. An increasing number of older people, who require costly retirement and medical-care programs, add to the burdens on national budgets.

In Germany, the national debt/GDP ratio is 62.6%; in Italy, the figure is a precarious 104%. In Japan, it’s monstrous, with debt equal to 200% of its GDP. (Canada’s national debt is just 62% of GDP.)