A long-awaited deal to restructure Greece's debt has been rejected by eurozone finance ministers, and the government will now need to return to the negotiating table as it desperately attempts to stave off a sovereign default.
The country has been locked in talks with its private sector creditors, seeking to cut as much as €100bn from its external debt through a bond-swap deal with investors. European finance ministers were presented with a plan, thought to include a "haircut" of up to 70% of the bonds' value in exchange for new instruments with longer maturities and higher interest payments.
The euro fell against the pound and the dollar, but its slide was moderated by better economic data from the single currency area. A bounce in numbers from the service sector raised hopes that the eurozone might manage to escape a recession in 2012.
A successful deal in Athens is critical for the country to avoid a default. Greece has nearly €14.5bn worth of bonds left to repay by the end of March, and currently has no access to the cash to pay. A bailout from the International Monetary Fund (IMF) and the European Union (EU) is contingent on the so-called "Private Sector Involvement" (PSI) being resolved.
Representing the private sector bondholders is the Institute for International Finance (IIF), which said on the weekend that its final offer was at the furthest extent of what investors would accept. The rejection by the eurogroup was concerning. Finance ministers were willing to accept the size of the "haircut" but not the interest that was to be paid on the new bonds. This potentially leaves negotiators at a deadlock.
Charles Dallara, the IIF's managing director, told a press conference that he was confident that a deal could be reached.
Speaking at a separate press conference in Brussels, Oli Rehn, the European economic and financial affairs commissioner, said that he hoped talks would be concluded in the near term.
"The building blocks are there to reach an agreement shortly. The talks between the private creditor community and the Greek government have progressed well," Rehn said. "It is certainly preferable to reach an agreement in the coming days."
The rating agency Standard and Poors (S&P) indicated that it would consider any deal as a "selective default" - although it is increasingly clear that the markets are typically some way ahead of the rating agencies in their analysis, and would be unlikely to react dramatically to such an announcement.
A voluntary agreement would probably avoid a full, unstructured default - for the time being.