Financial markets in Europe opened yesterday morning to the news that after seven hours of talks among EU finance ministers on Sunday aimed at avoiding a Greek default and a resulting domino effect across the region, the ministers had decided on a tough approach. The Greek Parliament must agree to extensive new budget cuts and a raft of asset sales by the end of this month if the European Union and International Monetary Fund are to release €12 billion of loans by mid-July.Clearly, the EU finance ministers are mindful of the political instability affecting Greece. The Greek prime minister was forced to reshuffle his cabinet last week, and faces a parliamentary confidence vote today. The EU finance ministers are trying to emphasise the importance of these measures being introduced quickly - without an effective government in Greece, there can be no agreement. Markets in Asia generally slumped yesterday afternoon as the cautious optimism of Friday that a deal might be done waned.  The credit markets were hit hardest last week, credit default swap markets in particular. Markit's iTraxx SovX Western Europe index, which comprises the CDS spreads of all the western European sovereigns, including Greece, reached its highest level yet on Thursday, at 240 basis points. CDS spreads for Greece itself went through 2000 bps on Friday morning, while yields on two-year Greek bonds reached 28 per cent per annum.Markit reported that the CDS spreads generally rallied on Friday afternoon as news spread of a breakthrough in a meeting between the French and German leaders, Sarkozy and Merkel - there would be no soft restructuring of Greek debt, but rather the model of the Vienna Initiative, used in Eastern Europe in 2009, would be followed.This means that following provision of the immediate funding the EU and the IMF are willing to make available, and subject to the passing of the latest austerity measures demanded by the EU, work will start on agreeing to a second bail-out package for Greece. This will require a 'voluntary' extension of bond maturities. How bondholders will be encouraged to voluntarily extend the maturity of their bonds is less clear. If there is any hint of coercion the credit rating agencies have already warned they will call this a default. But this question may not have to be answered. The markets are becoming resigned to the prospect of a Greek default and, given the unstable position in Greece, the day of reckoning may be close at hand. People are already talking of how the Russian economy boomed after it defaulted in 1998. But, then again, that very nearly precipitated a Lehman Brothers-like event, as it brought down the massive hedge fund, Long Term Capital Management. The combined efforts of Wall Street's banks, coordinated by the Federal Reserve Bank, were required to contain the fall-out from that collapse. The EU should really be working now on its plans to contain the fall-out when Greece defaults.