Greek financial markets rallied on Tuesday on the eve of an emergency meeting of eurozone finance ministers that some hope could be the first step towards finding an agreement to ease the standoff between Greece and its lenders.
Finance Minister Yanis Varoufakis makes his debut meeting with euro zone peers on Wednesday, when he will outline Athens' demands for a new debt deal that would allow it to shake off much of the austerity imposed under a 240 billion euro ($271 billion) European Union/International Monetary Fund bailout since 2010.
The EU targets an interim deal with Greece at another meeting next Monday, with “low expectations” for a breakthrough this week.
Athens also wants a “bridge agreement” until June to buy time until a properly negotiated settlement.
A report by MNSI, citing sources, said the European Commission would put forward a compromise proposal and that according to the plan Greece should ask for a six-month period during which it would discuss and agree with lenders all pending issues and a post-bailout plan. The Commission said there was no formal proposal.
“We know it's going to be a tough period of negotiations but at least they've got some sort of starting point,” said Orlando Green, a strategist at Credit Agricole.
“It's a game of chicken at the end of the day but it will eventually result in one side bending more than the other, but they both claim victory.”
Yields on three-year Greek bonds fell 250 basis points to 19.36 percent, with five-year yields down 138 bps at 15.19 percent. They remained far above 10-year equivalents, which were 85 bps lower at 10.46 percent, reflecting investors' concern that they may not get all their money back.
Greek shares advanced, with the country's benchmark ATG equity index rising 8 percent. Shares in its major banks also rose, with the Athens Stock Exchange FTSE Banks Index rising 14.8 percent.
Greek bankers said deposit outflows have slowed so far in February after a sharp increase estimated for a month earlier, easing concerns that the bailout standoff would leave the banks starving for cash.
Prime Minister Alexis Tsipras, who led the left-wing Syriza party to victory in last month's election, is widely expected to win a confidence vote in parliament later on Tuesday.
Defense Minister Panos Kammenos said if Greece failed to get a new debt deal with the euro zone it could look elsewhere.
“The negotiations between the lenders and Greece are likely to prove both tough and long-winded,” said DZ Bank strategist Daniel Lenz.
Other European countries are increasingly concerned about potential fallout on their economies of a Greek exit from the euro zone. British finance minister George Osborne said the danger of a miscalculation leading to a “very bad outcome” between Greece and the euro area was increasing, Bloomberg reported.
Bundesbank President Jens Weidmann urged Greece to make a credible effort to get back on its feet via solid public finances and a more competitive economy.
Some analysts say both sides need to strike some kind of compromise to avoid the recent sharp selloffs in Greek stocks and bonds from spilling over to other markets.
“It would seem the market is taking a glass half full view of Greece's reported proposal - perhaps simply owing to the fact there is a proposal at all,” Rabobank strategists said in a note.