The news started today with S&P downgrading Greek bonds to junk. It wasn't just the sovereign debt that became junk, but also the debt of many of the major Greek banks as well.
This dramatically increases the risk of default because junk rated bonds cannot be swapped for Euro-backed bonds, and this has markets very worried.
Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, S&P said.
The yield on a two year Greek note is nearly 19%, a completely unaffordable level that effectively locks Greece out of the global debt markets. The only alternatives left for Greece are bailout or default.
The race to get money out of Greece has become a self-fulfilling crisis. The Greek stock market has dropped 22.7% y-t-d and crashed 7% just today.
Like most financial crisis, it spills over borders.
Portugal's debt was also downgraded today from A plus to A minus. In response, the spread between German bonds and Portugal's bonds reached 5.51%, this highest since the creation of the Euro.
Lisbon's stock market plunged 5% today and is down more than 15% y-t-d.
The contagion is already being felt in Spain, where the stock market dropped 4% today, and is down 12% y-t-d.
A senior Lisbon banker said: “The problem is not Portugal itself, which is in a much better fiscal position than Greece, but the possibility that the Greek crisis could spread by contagion to Portugal and then, much more seriously, to Spain.”
Spain has a much larger economy than Greece or Portugal. If Spain were to collapse the entire Euro monetary system would probably collapse with it.
Concerns about the future of the Euro caused it to fall against the dollar today after Germany's FDP hinted that Greece might have to temporarily leave the Euro.