There seems to be no end to the bad news still awaiting Greece. No sooner had it activated its putative €45bn bail-out from the European Union and the International Monetary Fund than the edifice started to crumble, capped by the country's downgrading yesterday to junk status by Standard & Poor's. That sent yields on two-year Greek paper, already hovering at 14 per cent, into territory bordering on the stratospheric: the yield surged at least another 450 basis points after S&P's pronouncement. Yet this is understandable: investors have started pricing in the next risk on the horizon – the prospect of a very large debt restructuring and a significant haircut.

Granted, the bail-out will allow Greece to avoid having to tap the markets for about a year. This is at least a relief. Credit Suisse estimates it needs to raise €10bn by the end of May, and with virtually no demand for Greek paper, it will probably be satisfied by IMF funds.

Had the aid package been announced three months ago, it would have been a positive surprise. By last week it was overdue and insufficient. Barclays Capital estimates Greece needs a €90bn package over three to four years to give it the breathing space to implement a credible fiscal adjustment. Given that spreads for all eurozone peripheral countries have jumped since April 1 – Spain's has risen from 72bp to more than 110bp – the contagion effect of a Greek debt restructuring is the sole factor influencing investors' risk perceptions of the other Club Med countries. Those perceptions will only intensify after S&P yesterday downgraded Portugal by two notches too. But the downgrading of Greece's debt has shifted investors' focus from whether a debt restructuring was likely to just how costly such a restructuring will be.