EUROPE still has a chance of safely shepherding Greece through what increasingly looks like an inevitable default and of restoring faith that investors can protect themselves against governments not repaying debt.
But time is running out fast. Greece cannot pay a €14.5bn bond that will fall due on March 20 and a deal with bondholders needs to be finalised well before that date.
Many in the markets would welcome an orderly Greek default, whereby Greece's lenders allowed it to renege on its commitments, provided that this avoids a far more painful hard default, which could herald the end of the single currency.
"People often ask if Greece is going to default, which is a misnomer because Greece is (already) defaulting," said Richard McGuire, a strategist at the Dutch bank Rabobank.
A managed default would trigger a payout of Credit Default Swaps (CDS), which offer insurance against default of a company or country, and would restore trust in these financial tools that are crucial for investors to hedge against risk.
"Regulators across the world would breathe a sigh of relief that hedges which many of their regulated financial entities have on their European positions are effective," said one market participant, who asked not to be named.
The future of the market for sovereign CDS has been put in doubt because politicians were initially adamant that banks and other investors should voluntarily swap their Greek bonds for new ones worth half the original value. Such a voluntary agreement would likely leave investors unable to claim the protection offered by CDS.
But Greece is now openly threatening to force unwilling investors into the deal, bringing an element of coercion into the negotiations that will likely be sufficient to trigger a CDS payout.
Lehman Brothers triggered widespread market panic on fears that up to $400bn (€311bn) in CDS would be payable when it collapsed in 2008. But the amount actually paid out was relatively small, and it would be smaller for Greece.
The maximum that could change hands from a Greek default is $3.34bn (€2.6bn), according to the Depository Trust and Clearing Corporation, a clearing and settlement company.
At all costs, Athens and Europe want to avoid a hard default, whereby Greece fails to reach a debt deal and runs out of money, because a deal with creditors is a precondition for securing its second international bailout.
"We're at this stand-off. You will see some eleventh-hour brinkmanship because it's only when these agents are staring fully down the barrel of a messy default that one or more will give ground," said Mr McGuire.
Ratings agency Standard & Poor's also said this week that it believed Greece would default on its debt, but left unanswered the question of what form the default would take.
"The market is assuming that Greece is going to default," said Marc Ostwald, strategist at Monument Securities.
"But the working assumption is that it's going to be something that's sold as an orderly default. A hard default would come as a shock."
A hard default would be seen as a sign that politicians had lost control of the single currency and markets would then take aim at other weak countries, such as Italy, Spain and Ireland, Mr Ostwald said.
The focus this week is on ways to turn discussions with creditors -- which were suspended last Friday over the interest rate on new Greek bonds -- into talks on an orderly default.
It is becoming ever more likely that Athens will force at least some creditors into the deal by writing provisions known as 'collective action clauses' into contracts.
These would force the conditions of the bond swap on all other creditors, regardless of whether they sign up for the deal or not.
Writing such clauses into law wouldn't amount to a default, but using them to squeeze out bondholders would -- and would almost certainly trigger payouts. (Reuters)