Greece Downgraded To "Junk", Portugal Downgrade Exacerbates Fears

If things weren't bad enough for Greece, today rating Standard & Poor's downgraded the company's credit ratings to "junk." In addition, another ailing European country, Portugal, was downgraded two-notches to 'A-'.

The downgrades, and the grilling of Goldman Sachs (NYSE: GS) executives before a U.S. Senate subcommittee, have sent markets into a tailspin today. A 1:30PM ET the Dow is down over 100 points.

Standard & Poor's lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to 'BB+' and 'B', respectively, from 'BBB+' and 'A-2'. The outlook is negative. At the same time, the firm assigned a recovery rating of '4' to Greece's debt issues, indicating our expectation of "average" (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The 'AAA' transfer and convertibility assessment is unchanged. "The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory," said Standard & Poor's credit analyst Marko Mrsnik.

Standard & Poor's lowered its long-term local and foreign currency sovereign issuer credit ratings on the Republic of Portugal to 'A-' from 'A+'. At the same time, the local and foreign currency short-term ratings were lowered to 'A-2' from 'A-1'. The outlook is negative. The 'AAA' transfer and convertibility assessment is unchanged. "The two-notch downgrade reflects our view of the amplified fiscal risks Portugal faces," said Standard & Poor's credit analyst Kai Stukenbrock. "Under our revised base case economic growth scenario, we expect the Portuguese government could struggle to stabilize its relatively high debt ratio over the outlook horizon until 2013. Portugal's public finances in our view remain structurally weak, notwithstanding the government's substantial public sector reforms of recent years."

The downgrades have sent volatility spiking today. The VIX is 13% to 19.85. The iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) is up 7%.

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