More Bad News for Greece

Despite the positive thoughts we had about the resolution of the Greek crisis last week, the whole situation took another step backwards yesterday. The $60 billion emergency-aid package that seemed to signal a turnaround wasn't enough to keep Standard & Poor's from dropping Greek bonds to junk status. Greece, a member of the powerful European Union, is now considered no more creditworthy than Azerbaijan.

What does that mean for the world's economy? First of all, it means that Greece, already in tremendous debt, is going to have to pay even more money to get investors to buy its bonds. Yields on two-year Greek notes are a staggering 18 percent. That reflects S&P's concern that Greece will default on these bonds and never repay them, which is start to look more and more like a real possibility. 

The worst-case scenario is that Greece - and possibly Portugal as well - defaults on its debt and leaves the euro community until it gets it fiscal house in order. That would be an extreme case, but if the other European nations have no interest in propping up Greece, that would confine the damage to Greece and the poor saps who bought all of its debt (which does include several other European governments). It promises to be a messy procedure, but if Greece and perhaps Portugal are the only nations that end up defaulting, it shouldn't have too strong an effect on the American economy. We shall see.