PIGS get slaughtered by rating agencies

This week S&P downgraded:

Spain to AA from AA+ and kept a negative outlook;
Greece to BB+ from BBB+ (three notches) moving it to junk levels; (Moody's downgraded Greece to A3 last week. It is surprising it was not larger.)
Portugal was cut two notches to A- with a negative outlook.

Moody's and Fitch have not yet weighed in so it is likely we will have more bad news although the market impact will be less pronounced.

While it was not surprising, the market reaction was swift. Greek bond spreads exploded higher and stocks got hit. The IMF also stated that Greece will need almost double what as expected just a few weeks ago. The most interesting point is that EM countries that needed IMF funds usually still had a either a default or a devaluation. The death spiral of rising spreads and needs for more funds almost always end poorly. The price on both the country or bondholders will be high.

Interesting comment from Brown Brother's Win Thin who stated that Greek bond spreads are at the same level as before joining the Euro zone. The quality of credit has not changed after all of the benefits of having the Euro.