A day after Portuguese and Greek debt was downgraded, Spanish debt has been as well. Fears of contagion, sparked yesterday, are only growing, and the Greek situation remains dire.

Commentators argue that a Greek default would lead to large losses for some European banks--banks that can't afford that kind of shock. The EU could bail out Greece, but that might be politically infeasible in Germany, the country that would have to lead the effort. It's not clear, at this point, what would solve the problem and keep the instability from spreading. Just how bad is it? Have a look--the pessimism is pervasive.
  • European Response Definitely Not Helping  With the latest news, what do European leaders do? "Spain ... in time-tested EU fashion--calls an EU Summit to discuss the issue--on May 10, two weeks from now. Considering that Greek bond spreads have risen 15 percent in a matter days, it is hard to take such a proposal seriously," writes the Peterson Institute's Jacob Funk Kirkegaard. "The Greek authorities took drastic action to reverse the situation … by banning short-selling of shares on the Athens stock exchange until June 28. Should one cry or laugh?"
  • Greece's Fate: Latvia and Estonia  Those two countries show what will happen to Greece "if it follows the advice it gets from the IMF and the European Union," says Mark Weisbrot in the Guardian. In two years, Latvia lost 25% of its GDP.
  • 'Idea That the Financial Crisis Was Over Is Being Called Into Doubt,' declares finance blogger and analyst Yves Smith, who later notices, too, that "a more direct source of trouble" and contagion, previously overlooked, is "that of bank runs in the countries at risk" (earlier she and others had focused exclusively on the dangers for European banks losing money through a Greek default).  She also points out that, in the Great Depression, the "nadir" was the sovereign debt default phase"...and Europe appears to be approaching sovereign debt default right now.
  • 'The Most Terrifying Words I've Seen Written So Far,' Megan McArdle says of Yves Smith's analysis. She also adds that, "like a lot of analysts, I don't see much chance that a bailout is going to work [for Greece]."
  • 'I Think I'll Go Hide Under the Table Now,' declares Princeton economist Paul Krugman, who looks at the mess of bad options surrounding cutting Greece off from the euro, and the possible bank runs and crises that surround them.
  • A Two-Front War  "Well, I don’t know how many other people have noticed, but the Hungarian forint tanked today," announces Edward Hugh at Credit Writedowns. He sees signs "that contagion is now moving Eastwards, meaning that EU institutions will now increasingly face a battle on two fronts."
  • To Add to the Mess: Unreliable Figures  Douglas McIntyre looks at mistakes in Spanish unemployment figures: they were actually higher than previously reported, "which means that its credit crisis may be getting worse more quickly then believed." Futhermore, "messy bookkeeping will almost certainly make the problem of 'contagion' worse."
  • Greece Must Default, but Maybe It Can't  A contributor to finance analyst site The Pragmatic Capitalist says "I have been racking my brain for several weeks now attempting to think of a good outcome in the Greek debt crisis ... there really are no good solutions here.  I keep coming back to the same conclusion--Greece should leave the EMU and default on their debt." Here's the problem: "I am not so certain that they will be allowed to default. The BIS shows that European banks have almost $190B in Greek exposure and would be unlikely to get more than about 30-40 cents on the dollar--that is an intolerable hit to already fragile European banks."
  • Global Issues  Jack McHugh at Barry Ritholtz's The Big Picture says Credit Suisse's proposal for the crisis--which "involves hefty amounts of debt monetizing by a central bank"--makes sense "only if the ultimate goal is to hold the EU and euro currency together in their current legal structure at all costs. Other solutions range from kicking Greece and other weak sisters out of the EU to seeing Germany withdraw and go it alone with a new deutsche mark." But all of these, "whether they involve a shift in EU membership, money-printing, or some combination thereof, are problematic and will lead to further volatility in the markets." What's more, other countries could soon be facing similar problems: this isn't about a few banks, but about broader structural flaws based on spending and borrowing.
  • A European TARP, Which Germany Won't Support  It's a possibility, says Daily Finance analyst Peter Cohan, but "the biggest contributor to such a program would be Germany, which is not happy about even participating in a far-smaller Greek bailout." That makes things messy: "When a country's oxygen supply is cut off, the question for the rest of the world is how long it will take before the magnitude of the capital-withdrawal wave from the EU slams the rest of the world."
  • Merkel's Hands Are Tied, notices Business Insider's Joe Weisenthal, looking at a New York Times piece on the subject. "The world wants her to act, but big elections are coming up next month that could upset her coalition, and a Greece bailout will prove toxic."
  • 'Spain Is Totally Screwed,' tosses in Matt Yglesias, helpfully. He acknowledges that his is an "amateur opinion."
  • 'Eerily Reminiscent of September 2008'  Peter Boone and Simon Johnson post a lengthy, comprehensive analysis of the situation, complete with explanation of why the eurozone was a bad idea to begin with. They list "three possible scenarios." The ECB could "somehow buy up all the bonds of troubled eurozone nations. But this is exactly the process that always and everywhere brings about high inflation," and the Germans would hate it. "Second, officials still hope that bond yields for weaker governments widen but then stabilize.  This is bad news for troubled eurozone countries, but they manage to avoid default ... Call this the trickle down scenario or just a miracle." The third option is the "most likely"--this is "the nightmare," where Italian and Spanish bond yields skyrocket, following Greece and Portugal. "The euro zone will be at risk of massive collapse." To deal with this, there will need to be "a very sharp fall in the euro, restructuring of euro zone fiscal/monetary rules to make them compatible with financial stability, and massive external liquidity support." One slight hiccup after this massive shock will be that, in order to have the IMF step in and clean up, they'll have to switch IMF leadership: "Mr. Strauss-Kahn, the current head of the IMF today, very much wants to become the next President of France."