This morning we see, once again, fears on Greece and Dubai weighing on markets. Yes, risk aversion is coming back, and with good reason.

After the Dubai situation shocked and will continue to surprise the investment communities, and after S&P first gave a downgrade warning to Greece, Fitch has now finally downgraded Greek sovereign bonds from A- to BBB+ with negative outlook, which usually leads to a downgrade within a month.

Investors should take this seriously and especially in the context of surprising things to come. EU Commissioner Joaquín Almunia already said that Greece was a matter of “common concern.”

In my opinion, we are slipping into a situation of negative feedback loops, where downgrades will raise interest rates that in turn will make further downgrades more likely. By the way, yesterday, Moody's reduced the U.S. state of Illinois in its general government obligations to A2 from A1. Greek spreads yesterday were plus-220 basis points while Dubai was at plus-550 basis points.

In the meantime, we have learned the European Union is “ready to assist” Greece, but they don’t mean assisting as in a bailout but assisting in helping the Greek government to correct its deficit. In clear terms, that means that the EU is putting additional pressure on the Greek government.

Fitch estimates that debt-to-GDP of Greece will stabilize at 130 percent of GDP. The core part of its assessment says: “Given the poor historical track record of public finance management, Fitch is not convinced that the substantive pension reform and other measures necessary to contain public spending pressures and broaden the tax base will be sufficiently strong to materially reduce debt over the medium- to long-term and hence Greece’s vulnerability to future adverse shocks.” Fitch also said fiscal slippage relative to current plans could result in a further downgrade.

As already said before, there has been a marked pick up in the pace of inflows into dollar denominated paper longer-term, which is over one-year paper since late September and coinciding in some way with a marked pick up in the pace of inflows into German paper since early November, both acting as a counterpoint to the outflows from Greece et al.

One could ask when the next financial earthquake will strike? The European Central Bank decided that the minimum acceptable collateral rating for the ECB is temporarily BBB- for non-asset-backed securities until the end of 2009, and then A-.

For asset-backed securities, the minimum rating requirement is AAA at issuance and at least A- during the rest of its life. So, at present, Greek bonds’ BBB+ rating is still OK and, for now at least, Greece still has about three weeks to find a solution.

We only can hope they find one that is serious and doable. As far as I’m concerned, I have serious doubts. Greece has gotten plenty of red flags this year before the Fitch downgrade:

• Jan. 14: S&P cut Greece's long-term credit rating to A- with a 'stable' outlook.

• Oct. 19: The 2008 budget deficit was revised to 7.7% of GDP from a 3.7% estimate in January.

• Oct. 20: New Finance Minister George Papaconstantinou said the 2009 budget deficit would hit 12.5 percent of GDP, more than double what the previous, conservative government had forecast.

• Oct. 22: Fitch cut Greece's credit ratings and warned of further downgrades ahead.

• Nov. 10: The European Commission singled out Greece as the worst offender, with wide budget deficits.

Also, keep in mind that Greece has a boatload of vulnerabilities. Greek debt is second-worst only to Italy in the Eurozone. According to Fitch, it will reach 115 percent of GDP in 2009 and 130 percent of GDP by the end of 2010. The country has been running persistent budget deficits above the EU’s 3 percent limit since 2000.

Moreover, the country’s banks are highly exposed to the troubled economies of Eastern Europe, which in turn pose a downside risk for its budget outlook. The new cabinet pledged to boost public spending. Any sign of fiscal loosening will not be welcomed by the markets and the yield spread of Greek government bonds over German bunds could widen further.

The country’s economy is facing continuous recession as the crisis hits two pillars of the economy — shipping and tourism. In 2008, Greece saw its current account deficit soar above 14 percent, which was the highest in the Eurozone.

In the meantime, this morning in Europe:

• Greek 10-year government bond yield rose to 5.4 percent.

• The Greek-German 10-year bond yield spread widened further, to 225 basis points.

• Five-year Greek credit default swaps rose to 226.8 basis points in Europe vs. 209 basis points at the New York close yesterday.

For sure, that’s not good.

What investors have to take into account: Yes, risk aversion is coming back in 2010 for a lot of debt-related reasons in various places. And, as long as risk aversion is coming back, don’t short the dollar. Shorting the dollar now could cost you dearly.

On the U.S. markets I would like to say the following: The ETF SPY, which mirrors the S&P 500, moved, once again, below 110 to fill the third gap, but this is not enough to affect the medium-term uptrend. Since Nov. 10, the SPY has been locked in a four-point trading range. This range extends from 108 to 112 with 110 as the focal point.

The 60-minute chart shows SPY edging higher over the last four weeks. Six gaps in 16 days make it pretty much impossible to play swing reversals. Here we are again. The swing is down after yesterday’s gap below 110, but SPY is trading near support around 109-109.5.

This is the point where individual trading style and preferences come into play. Bottom pickers see a low-risk opportunity near support. Short-term reversal players see a downswing as long as resistance at 111 holds.