Regarding market reaction to this unfolding saga, it's all about...

Regarding market reaction to this unfolding saga, it's all about perception which merely reflects the mood of market participants. Whether or not a country has sustainable debt or not is determined by market psychology, not actual figures. During rising social mood (for decades up until 2007) people felt optimistic about the future so credit expanded, asset prices rose and debt risks were ignored. During declining social mood (since late 2007) people become increasingly pessimistic so credit has contracted, asset prices are declining and debt risks are now the focus.

Financial markets are not rational. They only appeared so after the long rising trend in collective market sentiment was supported by lagging positive economic indicators (eg. economists described the “goldilocks economy” in 2007). Emotionally driven financial markets will again appear rational only after the long decline in social mood has bottomed (which will be supported by economists pronouncing a “new era of deflationary depression”). Given that financial markets are a paradox, that will be the time to buy deflated assets. We remain years away from such a turning point.