Well, it’s official–if not shocking, apparently, to some market participants: Greece has been downgraded to junk status, and Portugal got a two-notch credit rating drop to A-. The Greece move seemed like a foregone conclusion, and yet it seems to have caught Wall Street off-guard. Stocks fell sharply after the announcement.
Here’s a look at credit default swap pricing today. The table is sorted by the percentage change (circled heading). The right-most column is the implied probability of default. This issue is not going away. The problems with each of these countries is too much debt, a problem that can’t be solved with more debt. It’s going to require fundamental and hard changes to budgets. Unfortunately for the governments there, the citizenry doesn’t just write letters to their Senators and Representatives in Congress, they break windows.