Europe is heading into its 11th hour in an increasingly fragile state, after a weekend of high-level meetings that failed to make any progress and an election that weakened German Chancellor Angela Merkel.
Finance ministers and central bankers meeting in Wroclaw, Poland, failed to agree on how to solve the troubles in Greece, whose prime minister pledged to shore up the country's finances and cancelled a trip to the United States this week to deal with the coming "critical" seven days.
In Germany, the coalition of German Chancellor Angela Merkel suffered its latest electoral defeat on Sunday amid voter anger over her handling of the debt crisis in the 17-member euro zone, hampering her ability to play a stronger role in resolving it.
The standstill over whether and how to rescue Greece risks further undermining confidence in the euro zone and in the global financial system as governments, central bankers and policy makers in the monetary union haggle more than 18 months into the crisis.
European banks already face funding difficulties, and a Greek default would lead to losses for lenders and costs at banks that insure the debt, potentially spilling over to institutions worldwide.
While Greece's deputy finance minister said last week that the country has enough cash reserves for October, Spain's finance minister said after the meeting in Poland that the EU finance ministers haven't even considered the possibility of a Greek default.
"Policy makers in Europe remain in denial," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. "We can be pretty sure that Greece will run out of cash sometime soon."
Greek Prime Minister George Papandreou, meeting with his cabinet on Sunday in Athens following the two-day conference in Poland, pledged to take the decisions necessary to avoid default, without outlining any new measures to turn a budget deficit into a surplus. The country has faced violent protests and strikes to oppose government spending cuts.
"If we want to avoid default, to stabilize the situation, to remain in the euro zone … we must take big strategic decisions," Greek Finance Minister Evangelos Venizelos told reporters after the meeting, according to Reuters.
In a Berlin election on Sunday, preliminary results showed a defeat for Ms. Merkel's Christian Democratic Union. That's the latest in a series of setbacks in regional elections this year for Ms. Merkel, who is struggling to balance domestic calls to avoid throwing money at Greece with international calls for Germany, Europe's biggest economy, to play a greater role in solving the debt crisis. A German parliamentary vote on the latest euro zone measures is set for Sept. 29.
"We're approaching a tipping point in the euro zone debt crisis, where sooner or later Greece will have to default," said Michael Hewson, an analyst at CMC Markets in London. "Every time she [Ms. Merkel] gets a kicking at the ballot box, that makes it much harder to not put German interests first."
The euro has weakened and stock indexes have plunged this year amid the turbulence in Greece and other countries, notably Portugal, Ireland, Italy, and Spain. Bank shares in France, the world's top creditor to Greece, have led declines among European equities on concern they'll face losses if Greece defaults.
Last week, the European Central Bank led an effort that involved the U.S. Federal Reserve and others to bolster the euro financial system by providing three-month loans in U.S. dollars to euro zone banks.
The European Union and International Monetary Fund agreed to a €110-billion ($148-billion) rescue package for Greece in May, 2010, as they sought to avert the biggest crisis in the common currency's 11-year history. The EU and IMF are weighing whether Greece has met requirements to receive the next instalment of €8-billion under that plan.
Greece is rushing to meet demands from international and EU partners that will allow the release of that sixth tranche of loans to prevent default.
Euro zone finance ministers meet again early next month to decided on the release of the instalment. Providing they agree, Athens would be able to meet its payments through this year.
With files from Bloomberg News and Reuters