As the latest Greek rescue drama lurches toward an uncertain finale, the markets have concluded Athens will agree to tougher austerity measures, private-sector creditors will take a hefty haircut on their bonds, banks will stabilize their finances and other fiscally challenged euro zone countries will continue to muddle through.
Based on positive trends over the past few weeks, market participants no longer seem poised to push the panic button every time European policy makers run into hurdle on the long road toward resolving the sovereign debt crisis and avoiding a Greek default.
The worst-case scenario - a messy default and removal or withdrawal from the euro zone - "no longer seems imminent," said David Woo, head of global rates and currencies research with Bank of America Merrill Lynch.
Investors drove up stocks in North America and other markets outside Europe. U.S. Treasuries, the traditional haven for fearful money, were essentially flat; gold, another port in a storm for worried investors, fell. The euro held steady after a recent runup, while commodity prices, which take a beating whenever worries surface about a euro zone breakup, rose.
Even in the deeply troubled European sovereign debt universe, there were signs of improving sentiment. LCH Clearnet reduced the extra margin it requires for clearing some Irish government bonds to 25 per cent from 35 per cent. Lower margins reduce the cost of trading the bonds.
"The market still hasn't wrapped its head around the fact that a Greek accident could wipe out economies," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. "I can't tell markets that they're wrong. But I do think that people don't have realistic expectations yet of what a Greece can mean. They think of it being a small thing that can't possibly shake the world much. I disagree. Banks and economies are at risk here."
The latest news out of Europe provided little fuel for the gains, although signs of optimism could be spotted through the gloom.
Euro zone finance ministers and International Monetary Fund head Christine Lagarde will hold an emergency meeting in Brussels Thursday, sparking reports that their intention is to ratify a new debt deal with Athens.
Greek Prime Minister Lucas Papademos held meetings on Wednesday with the heads of the political parties backing his caretaker government. It's an indication that the government has completed its tough bargaining over deeper budget cuts demanded by the Europeans and the IMF in exchange for the rescue package. The spending cuts include sharply lower pension payments, a 20-per-cent cut in the minimum wage, reductions in state pay and shrinking the public sector by a further 15,000 people, according to a draft obtained by Bloomberg.
"To restore competitiveness and growth, we will accelerate implementation of deep structural reforms in the labour, product and service markets," says a Greek letter of intent.
Mr. Papademos said in a statement after seven hours of talks that party leaders had accepted all but one of the negotiated conditions. He did not specify the sticking point, but said the aim was to reach an agreement before the finance ministers' meeting.
Athens has failed to meet previous deficit-cutting promises, partly because of a severe economic slump that has slashed government revenue.
"Even if Greece gets the money, the problem of Greek non-compliance will resurface," said Peter Shaffrik, head of European rates strategy with Royal Bank of Canada's investment arm in London. "But the contagion risk will be reduced quite significantly if the bailout money were really to sit in an escrow account that will continue serving the debt."
Nevertheless, contagion remains a danger, others warn.
"There is no isolating or firewall effect of the current measures," said Constantin Gurdgiev, a finance lecturer at Trinity College in Dublin. "There is an attempt to delay the inevitable."
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