Doesn't nessecarrily mean they will stabilse in a positive way. Look at Somalia, they've been in a stable stable of constant civil war for the last 20 years (extreme example).

I've heard some argument (think it was on an editorial on the BBC) that the ratings companies might actually interpret this as a managed default, which is effectively what it is. Doesn't seem to have happened though.

Honestly, this financial aid that Greece received looks like nothing more than aa clever move to allow banks and other financial institutions that are holding greek bonds to build up financial reserves to write off the remaining debt once Greece defaults somewhere this christmas.

The situation that Greece finds itself in will not improve through these means. And if they default, they will not change their policy to a more liberal one, Greece will remain just like it was till now, only this time they will think twice before using creative accounting practices.

Like how everyone ringfenced Lehman brothers to stop contagion?

~6% is EXTREMELY light compaired to how much your economy would contract with a default.  A Default is looking at a 15% lowest, contraction, with huge contractions afterwords.

And yes... some countries who default do "burn for years".

It largely depends on the kind of default.   Your fine if it's a nongovermental default like Iceland.   It sucks, but is survivable when it's a government managed default where it looks like your trying.

A stubborn intentional default?

Your relying on foreign aid at that point.

Which one of these things is more humiliating to you and your country?  Forced austerity, or living off the scraps of what France, Germany and the rest of the world sends you as international aid packages.

Just to follow up on this train of thought, S&P just declared Greece to be in selective default.

Which makes sense, though I feel won't effect much.

Rally it seems more and more like credit agencies are following the market.... not the other way around.

Heck, look at the US downgrade.  That happened.   Since then, US bonds are in higher demand then ever.  Higher then a lot of the Triple A countries bonds.

Looking at it through that metric you'd think it was crazy the US had that kind of rating.

Wouldn't that be because a credit downgrade makes you higher risk, which in turn forces up the interest rates on your bonds, thus making them more attractive and allowing you to find more foreign financing? Which in turn allows you to run further expansionary fiscal policy, helping to push your home market forward and appreciate your currency.

So long as there is no real danger of default, one would almost think a little downgrade would be a welcome thing. The benefits more than make up for the bad publicity.

No that's now how bonds work.  US interest rates are down for bonds. 

I'll go with a quick explination of bonds that hopefully won't be too boring.

Bonds only go on sale when the government want to.  So say the US government wants to raise some pizza money for a congressional pizza party so they issue three bonds for $100 each with a 10 year yield. (Numbers kept low for simplicities sake.)

They auction these bonds, through the treasuries website.

The 100 bonds sell for $89, $90 and $91.  The average yield of the 10 year bond is 10%.  Then there is yield to maturity, which is a totally different more complicated thing... and the bond price, which is the price private investors get on the open market.

http://www.investopedia.com/university/bonds/bonds3.asp#axzz1nhkylYD8

The theory goes, a downgrade spooks the investors, causing less investors to buy bonds... therefore bond yields go up.  The theory doesn't always work in practice however, because your average modern investors are likely to have done a lot of research on countries bonds to begin with. 

Meaning that before the downgrade, people see the problems, pull out, driving the price down before the downgrade ever happens.

Just to build on what you said (talking about markets in general, not just bonds):

In the modern information age, just about everything is already priced into the market before it happens. Which means that stuff rarely drops when bad news comes out, and stuff rarely rises when good news comes out (though the rises will always outpace the falls, due to human nature, loss aversion - these will build up to sudden drops every now and again)

The markets always trend upwards, as it is generally accepted that tomorrow is brighter than today. Essentially it is only completely random events (say, non-predicted natural disasters, sudden collapse of financial institutions) which have any real implications on the markets, it's these random events which cause the markets to look random, and hide the general trend.