If you’re spooked by the recent downgrades of sovereign debt ratings on Greece and Portugal, you’re not alone. Investors pushed the broader market down about 2% after news of the cut. Naturally, exchange traded funds (ETFs) all across the board reflected similar sentiment.

On Tuesday, Standard & Poor’s announced that it had cut its sovereign debt ratings on Greece to junk status and Portugal to a lower rung in the investment grade category, reports Olivier Ludwig of Index Universe.

Specifically, Greece’s long-term debt was lowered to BB+ and its short-term debt to B. S&P also announced that it expects a 30% to 50% recovery for debt holders in the event of a debt restructuring or default. Portugal’s long- and short-term debt was lowered to A- and A+, respectively.

According to Paul Weisbruch of Street One Financial, financial stocks shed 3.4% on Tuesday, leading the way down, in part because of the Goldman Sachs (NYSE: GS) hearings on Tuesday. He notes that there had been a steady flow of put buying on the Financial Select SPDR ETF (NYSEArca: XLF) over the past two weeks. With the ETF down 3.4% on Tuesday, many of those trades became profitable.

Weisbruch also noticed put buying strategies on the Currency Shares Euro Trust ETF (NYSEArca: FXE) and call buying on the SPDR Gold Shares ETF (NYSEArca: GLD). FXE was down 1.4%, while GLD was up 1.7%.

The reasons behind the downgrades are apparent. According to Mike Larson of Money and Markets, Greece’s 2009 deficit was 13.6% of GDP. That’s four times the official limit in the EU! On top of that, its debt is now closing in on $400 billion, or 115% of GDP.

Although markets eased a little on news that Greece officially asked for a bailout from the EU, it doesn’t hide the fact that Greece is just the first of many countries that will be facing financial troubles in the wake of huge deficit spending.

Portugal’s 2009 budget deficit and total debt was 9.3% and 85% of GDP, respectively.

Larson also warns of trouble brewing in Ireland, Italy and Spain, all of which have GDP to deficit or total debt ratios above the EU’s limits. A number of these countries have significant weightings in some ETFs, such as the SPDR Barclays Capital Short-Term International Treasury Bond (NYSEArca: BWZ), which holds 10.7% Italy, 4.5% Spain and 2.8% Greece.

For more stories on Greece, visit our Greece category.

Sumin Kim contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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