I was talking about a scenario in which Greece wasn't part of the Euro. The bond market would have attempted to factor in the risk of default or currency devaluation in its purchases of Greek bonds.
Ah, I misunderstood: by free market you meant exchange rates, not the bond market.
But note that the Euro is for the purposes of this situation equivalent to the gold standard. Fixing exchange rates means trading the risk of currency depreciation for an increased risk of default, as we seem to be assuming the bonds are issued in the local currency.
The issue here seems to have been ignorance on the part of bind investors to the reality of the Greek situation.
