The euro zone is inching closer to breaking its long-held taboo against a Greek default, but can still escape financial market mayhem and a body blow to the euro.

It all comes down to whether the default is controlled or chaotic.

Officials have been talking to private bondholders for nearly seven months to get them to share the burden of a second international bailout of Greece with taxpayers, who have so far shouldered all the cost.

But there is still no result, and the threat of a forced default - something that politicians have long been adamant must never happen - drew closer on Monday, when euro zone finance ministers rejected what the banks had billed as their final offer.

Last year, the very prospect filled policymakers with dread but sentiment has changed a little.

Bond markets have thus far exhibited little sense of panic at the slow progress towards a deal, while the European Central Bank wiped out fears over a bank collapse by pumping massive amounts of cash to fund banks into the system in December, an offer it will repeat next month.

The other important shift has come from Paris and Berlin who late last year softened their insistence that private creditors should always take a hit in any future euro zone bailouts. They now say the Greek case is unique and will not be repeated.

Safe-haven German debt futures fell to a one-month low, while Italian bonds - used as a bellwether of sentiment towards the region's lower-rated debt - have rallied, driving yields away from levels deemed unsustainable.

Rating agency Standard & Poor's said on Tuesday it did not see any reason for a "domino effect" in the euro zone, if as expected it downgraded Greece's ratings to "selective default" when it concludes its debt restructuring.

Not all types of default need to upset the market, and some would simply say Greece - which has more than 350 billion euros ($460 billion) in debt, or 162 percent of its Gross Domestic Product - is already in default.

"If you ask me whether (the help of the banks) is already a restructuring, it's hard to argue against it," said one market participant, asking not to be named.

"You had an unwind of several financial institutions in the United States, but only Lehman had a negative impact," this person said, referring to the collapse of the U.S. bank in 2008, now seen as the nadir of the credit crisis.

Time is fast running out for Greece, which cannot repay a 14.5 billion euro bond falling due on March 20 without its second bailout. A deal with bondholders needs to come well before that, because the paperwork alone takes weeks.