How do you use bond prices/yields to infer probabilities of default? I would think of it as follows:
Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond prices and solve for $p$:
$$\begin{eqnarray} \tilde{B}(0,T) = B(0,T)rp + B(0,T)(1-p) \\ \frac{1}{1+\tilde{y}} = \frac{r}{1+y}p + \frac{1}{1+y}(1-p) \\ \left(\frac{1+y}{1+\tilde{y}} - 1\right)\frac{1}{r-1} = p, \end{eqnarray}$$ where $\tilde{B}(0,T)$ and $\tilde{y}$ are the defaultable bond price and associated yield respectively, $r$ is the recovery rate and $p$ is the probability of default.
A) Is this something you would actually use in practice?
B) How do you go about making an assumption on the recovery rate?