Markets are pricing greek debt as defaulted because it's the most rational thing for the greeks to do, and the most rational outcome. Greece holds power over the EU to the degree that its financial insolvency can bring the whole system down. (Technically, it's a power transfer from the EU to US as the fed has already bailed out the EU banks in anticipation of the Greek default)

When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something.

Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal.

Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.