Bonds are not like equities. Bonds pay out a fixed amount of interest, and so there is no chance of hitting the lottery; with equities, the company stock can s

Bonds are not like equities. Bonds pay out a fixed amount of interest, and so there is no chance of hitting the lottery; with equities, the company stock can skyrocket. Hence bonds are a risk-averse investment, and so bond holders are very jumpy about default. The Greek bonds, IIRC, before the CDS rates (credit default swap: basically a bet on the chance of a bond going into default) started creeping up, were issued at around 3% coupon. This value is consistent only with a very low perceived risk of serious default by the buyers of bonds. At the moment, CDS markets are showing a near probability of Greece going into default: the bond rates are artificially low only because of massive government and IMF intervention in the markets. Note also that even after the drastic austerity measures, Greece is still running a budget deficit, so if it defaults, it cannot finance its expenses even in the short term. Greece is small fry, but it is seen as a test case for bigger countries: probably Spain, possibly Italy. Actually, the situation is worse in Portugal than Greece, since Portugal is also insolvent and has shown nothing like the political resolve that Greece has. But Portugal is tiny. Many of the banks in wealthier European countries are heavily exposed to PIGS (Portugal-Spain-Ireland-Greece) debt, so expect serious PIGS defaults to be followed by rich country bank crises. German banks, in particular, are badly exposed to Spanish government debt. The "stress tests" of European banks carried out in 2010 explicitly did not test for sovereign default, presumably to avoid frightening bond holders.