Here's an updated chart of the short-term yields on sovereign debt in the questionable countries of the Eurozone. I haven't included Greece, since Greek 2-yr yields are off the chart (over 180%), and Greece is a lost cause anyway: most Greek notes and bonds are priced at 21 cents on the dollar.
Spain has made excellent progress. 2-yr Spanish yields haven't been this low since Nov. '10, and Italian yields are not far behind. Ireland gets credit for the most dramatic improvement of any of the PIIGS, with 2-yr yields having plunged from a high of 23% to just 5.2% today. The big decline in yields on the bonds of these three countries is one reason our Vix index has fallen from the 40s to now below 20; markets are breathing a big sigh of relief.
Bear in mind that Greek losses of $360 billion have already been priced in, as have Portuguese losses of some $110 billion, and the Eurozone sky has not fallen. The ECB gave the Eurozone banking system a liquidity reprieve with its recent loan facilities, and with liquidity conditions restored, the banking system has continued to function even as sovereign debt losses are likely to be on the order of half a trillion or so. There's no reason this can't continue.
As I've been pointing out since last July, the consequences of debt defaults have been greatly exaggerated because most people apparently don't understand that debt is a zero-sum game. The defaulting debtor wins, and the creditor loses. Debt is simply a promise to redistribute cash flows in the future, and if the debtor can't generate those cash flows, he can't redistribute them. The over-spending and over-borrowing that has been the bane of the PIIGS long ago resulted in economic losses, because the money they borrowed was not spent on productive activities. The Eurozone economy's scarce resources have already been wasted, and that's water under the bridge. All the gnashing of teeth and pulling of hair since last summer has just been about who will have to take the losses on his balance sheet. The economic losses have been incurred, now it's just about who will have to account for them.
Even if PIIGS debt losses were to reach $1 trillion, that would only be a drop in the global stock and bond market bucket, which is worth over $100 trillion.