Will Greece flee through the fire escape?

Global markets staged a modest rally overnight, buoyed by a flicker of hope that Athens might be able to break the political deadlock that has paralysed the country for the past four days.

Rumours are now circulating through Athens of a possible alliance between the socialist Pasok party, the conservative New Democracy and the small leftist Democratic Left party, which picked up just over 6 per cent of the vote in Sunday's election. Together, the three parties would control 168 seats in the country's 300-seat parliament.

The prospect of a coalition government appeared to improve after Democratic Left's leader, Fotis Kouvelis, who heads the small leftist Democratic Left party, indicated that he was willing to participate in a coalition government that would support keeping Greece in the eurozone, but not under the conditions of the country's €130 billion ($US168 billion) bailout.

Kouvelis also attacked the radical left Syriza party, saying said that its insistence on tearing up the terms of the country's bailout "will lead to bankruptcy and a break from the eurozone". Previously, Kouvelis had insisted that any coalition government should include Syriza, which picked up the second largest share of the vote in Sunday's election.

Meanwhile, European leaders have been shocked by a letter from Syriza's leader, Alexis Tsipras, which said he refused to recognise the memorandum signed by Greece's previous government agreeing to budget cuts and tough reforms in exchange for the €130 billion in rescue funds. According to Tsipras, the terms of the bailout were now "null and void”.

The German media reacted vehemently to Tsipras' move. The Frankfurter Allgemeine Zeitung saw it as a "slap in the face”, and added that the point now appeared to have been reached where "the country's exit from the eurozone is no longer being presented as a catastrophe, but rather as something that must be accepted as an unpleasant consequence of Greek political decisions". The conservative daily Die Welt took a similar position, saying that "Germans are not prepared to pay for the Greeks' denial of reality".

Countries such as Germany and Finland, which were hesitant in approving Greece's second bailout, are fast losing patience with Greece. At the same time, Brussels is worried that Greek political instability will prompt the International Monetary Fund to withhold its portion of the bailout funds.

Unless Athens is able to form a working government that can come up with €11.5 billion in fresh spending cuts by June, it risks having its aid money cut off entirely. Athens was hoping that its next tranche of aid money would include €23 billion to recapitalise the Greek banks, and an extra €8 billion to help it pay for pensions and run schools. If Greece doesn't get the money, it will have no choice but to quit the eurozone and start printing its own money.

Once again, Brussels is seriously examining the implications of a Greek exit. The prospect was first raised six months ago, when George Papandreou, who was leader at the time, said he wanted to hold a national referendum so that Greeks could vote on whether or not to accept the terms of the country's bailout.

At that time, European leaders were aghast because European banks were sitting on massive holdings of Greek bonds. Since then, however, the Greek debt restructuring has wiped €100 billion off the country's €350 billion debt pile. The exposure of lenders – mainly European banks and pension funds – to Greek debt has been whittled down to €70 billion.

Some fear that a Greek exit could spark runs on banks in other debt-laden eurozone countries, such as Ireland, Portugal or even Spain. But others see these fears as exaggerated. Greece, they point out, is atypical and there is no indication that Portugal or Ireland will go down the same path.

What's more, they point out that Greece could reap some economic benefits from reverting to the drachma. A cheaper currency could help it regain some of its lost competitiveness, and tourists would flock to the country if they no longer had to fork out high prices for hotels and restaurants on Greek islands.

Still, a cheaper currency could mean much higher inflation rates in Greece, because 50 per cent of goods consumed in the country are imported. Some economists argue that a sharply lower currency would crush the purchasing power of Greeks, while the inflation rate could soar to 30 per cent.