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Investors not dismissing risk of Greek exit from eurozone

BRUSSELS - Despite all the tough talk of ultimatums and games of poker, Greece and its creditors in the 19-country eurozone are still expected to cobble together some sort of deal that will allow the country to remain a member of the euro currency.

However, as a Feb. 28 deadline nears, jitters are mounting. For now, investors and European policymakers are not panicking despite a breakdown in talks between the two sides over the new Greek government's attempt to renegotiate its financial bailout.

That's likely because they've been here before. The eurozone has in recent years often run into moments of brinkmanship, often with Greece. Each time, a deal was clinched in time.

"If Greece were to leave the euro, the financial chaos that would follow could also spell the end of the Syriza-led government," said Jane Foley, analyst at Rabobank International, referring to the radical party that won elections last month.

"For this reason it remains our central view that an eleventh hour compromise between Greece and its creditors is still likely."

They're on borrowed time, though. Though the volatile stock index in Athens actually rose on Tuesday before slipping a mild 2 percent, Greece's government borrowing rates are rising steadily -- a sign investors are more wary of a potential bankruptcy.

"As negotiations over Greece's bailout stalled last night, the two sides seemed as far apart as ever," Jennifer McKeown, senior European economist with Capital Economics, said in a client note. "A deal still seems possible, but it might require a time-consuming Greek referendum. And in the meantime, the ECB could pull the plug on Greek banks, effectively forcing the country out of the eurozone."

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Financials market aren't completely discounting the possibility that Greece might fail to agree on a deal with its creditors, a development that could have big and unforeseen consequences both for Europe and the global economy.

"[T]here is a material and rising risk that the negotiations will fail (or drag on beyond the point at which deposit outflows or the Greek government's cash position become critical), amid continuing brinksmanship and a lack of goodwill afforded to the Greek government by its creditors," Ebrahim Rahbar, an analyst with Citi Research, said in a note.

The latest tension centers on the eurozone's ultimatum to Greece to ask for an extension to its bailout program by Friday before further negotiations on the country's future financing can take place.

Greece's new left-wing Syriza government made scrapping the bailout program a cornerstone of its recent triumphant election campaign. In return for 240 billion euros ($275 billion) of rescue money Greece has been getting since 2010, successive governments in Athens have had to implement an array of budget austerity measures such as deep cuts to spending and pensions.

Syriza, in power for barely three weeks, blames those measures for the country's economic ills -- the Greek economy is around a quarter smaller than in 2008, despite a recent modest return to growth while unemployment and poverty have swelled.

"It would be an act of subterfuge to promise to our partners to complete successfully a program we challenged the logic of," Greek Finance Minister Yanis Varoufakis said.

Jeroen Dijsselbloem, the top official in the eurozone who issued the ultimatum, is hopeful that Athens will agree to extend its current program and laid out the prospect of an immediate renegotiation of some of its terms.

"We want to formally extend the program and then talk what changes are possible within that," he said.

It could come down to something as simple as what words are used. The Greeks do not want an extension of the current program, but a "bridge" loan to see the country through between the official end of its emergency rescue package later this month and a new bailout deal.

Whatever it's called, both sides want the country to get a few months' worth of loans to buy time for more thorough talks. If they can agree on a word that saves face for both sides, a deal would be a lot closer, analysts say.