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A woman is silhouetted as she makes her way in front of the parliament building in Athens, February 18, 2015.

ALKIS KONSTANTINIDIS/REUTERS

Governments around the world heaped pressure on Greece to drop its tough negotiating stance with the European Union as the deadline to extend the cash-strapped country's bailout program moved ever closer.

In a call to Greek Finance Minister Yanis Varoufakis on Wednesday, U.S. Treasury Secretary Jack Lew warned that Greece faced a potential economic catastrophe unless the impasse between Greece and its official bailout sponsors is broken quickly. A statement from Mr. Lew's office, released after the conversation, said the secretary "noted that failure to reach an agreement would lead to immediate hardship in Greece, that the uncertainty is not good for Europe and that time is of the essence."

Other government leaders, among then French President François Hollande and Italian Prime Minister Matteo Renzi, have also urged Mr. Varoufakis and Greek Prime Minister Alexis Tsipras to find a compromise that would keep Greece's funding channel open while it attempts to balance economic reforms with relentless public demands for higher social spending. Greece's economy has shrunk by a quarter since the start of the financial crisis in 2008 and poverty is rife as austerity – the combination of tax hikes and spending reductions – punches holes in the social safety net.

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On Wednesday, the Greek government sent out signals that it was willing to back off somewhat on its hardline, anti-bailout and anti-austerity stance. Mr. Varoufakis said he believed the euro zone's finance ministers, known as the Eurogroup, would approve Greece's request for a six-month loan extension on Friday.

In response, Greek banks, which have reportedly lost some €20-billion ($28.4-billion) in deposits since December, rose on the Athens stock exchange, as did the value of Greek sovereign bonds. The European Central Bank soothed the nerves of bank investors somewhat by increasing the banks' emergency liquidity assistance by €3.3-billion, a relatively small amount.

But the German finance minister, Wolfgang Schaeuble, has, so far, been unwilling to cut Greece any slack, insisting that it must meet the repayment and austerity terms of the bailout program agreed by the previous government. In an interview with the German broadcaster ZDF on Tuesday evening, he said "It's not about extending a credit program but about whether this bailout program will be fulfilled, yes or no."

The pressure on the new, radical-left Syriza government, which was elected in January with a mandate to shed the €240-billion bailout program and the austerity measures that went with it, reflects widespread fear around the world that failure to reach a compromise could lead to Greece's chaotic exit from the euro zone.

Some economists and analysts think the economic and financial fallout of a Greek exodus would not be horrendous since Europe as a whole is no longer in recession. But others say it's foolish to predict a relatively benign response because no country has left the euro zone since the common currency was launched in 1999.

At minimum, Grexit, as it is called, would make a lie of the ECB's insistence that the euro is "irreversible," potentially shattering confidence in the currency.

At worst, it could lead to copy-cat exits if Portugal, Spain and other weak euro zone countries were to decide that reprinting national currencies – currencies that could be devalued – would be a handy shortcut to economic revival and political stability. "The bottom line as far as I am concerned is that both the euro zone and Greece would lose enormously if Greece were to go," said Nicholas Spiro, managing director of London debt consultancy Spiro Sovereign Strategy.

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The Eurogroup has rejected Greece's demands to end the bailout program and the conditions what went with it twice in the last week, taking Greece dangerously close to deadline that could make or break its euro zone membership. The current bailout program expires on Feb. 28 and Greece is running out of cash. The country could get hit with a fresh funding crisis as early as March, when it must repay the International Monetary Fund €1.5-billion. Billions more are to be repaid to the IMF and the ECB in the summer.

The new proposal from Mr. Varoufakis would lower Greece's budget surplus targets, allowing the government to spend more on social programs. It also wants to scale back the privatization effort, which will not sit well with the EU, the IMF and the ECB, and snatch €1.9-billion in profits that the ECB earned on its investment in Greek sovereign bonds.

In a Wednesday note, Elsa Lignos, senior currency strategist in London with RBC Capital Markets, said an agreement this week was not assured. "On both sides, there appears to be a strong desire to reach an agreement, but for all the noise, it is hard to identify any real progress in the past week, despite the tight deadline."

Total government debt % of GDP

This is a partial list of countries, ranked by their 2010 debt as a percentage of of GDP. While these OECD number only go to 2010, other sources peg the Greek gross public debt at 175% for 2013 and 176.3% for 2014 (European Commission).

SOURCE: OECD

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