As mentioned in the chapter, during early 2010, investors began to worry that the government of Greece might default on its bonds. The rating agencies downgraded Greek bonds several times. Following one of the rating downgrades, an article in the Wall Street Journal noted that: The spreads-or premiums demanded by investors to lend-to Greece versus supersafe Germany blew out again Tuesday, following Moody's downgrade of Greek debt to junk status Monday. . . . The spread between Greece and Germany was 671 basis points- or 6.71 percentage points, up by a little less than 80 basis points on the day.
a. What does it mean that Moody's downgraded "Greek debt to junk status"? What is Greek debt? What is junk status?
b. What is "the spread between Greece and Germany"? Why would the spread increase as a result of Moody's action?