Talks between Greece and its Eurozone creditors to extend its bailout may again break down and thus trigger more volatility for local assets, but the potential for contagion to other asset markets is contained for several reasons. All involved parties have strong incentives to eventually reach an agreement. Even if they can’t, the fact that most Greek government debt is held by official sector creditors should reduce the threat of asset fire-sales. Firewalls such as quantitative easing and the single resolution mechanism for troubled banks will help limit collateral damage, and some assets like the euro have already sold off.

As a recap, the existing Greek bailout agreement between the country and creditors, which include the IMF and European Commission, was due to expire at the end of February. On February 20, it was announced that the timeframe for deciding new bailout terms had been extended for four months. Should a new package ultimately fail to be agreed upon, expected loan disbursements would be cut off and the government may run short of cash. If no agreement is reached and the ECB cuts off the liquidity it has provided to Greek banks via the Emergency Liquidity Assistance facility, the slow exodus of private bank deposits may turn into bank runs as savers rush to withdraw what for now are euro-denominated savings but, in a worse case (exit from the Eurozone), could be converted to a new currency.

Tensions stem from the recent election victory of the Syriza-led governing coalition, which campaigned on a platform of renegotiating the existing bailout and easing austerity requirements. Syriza officials have softened their demands in recent weeks but still have managed only to extend discussions rather than agree on new terms. The troika is demanding that Greece run sizable primary surpluses (surplus before debt repayment and interest are taken into account) to facilitate debt repayment and conduct structural reforms involving the labor market and privatizing state-owned assets.

Both sides retain substantial incentives to compromise. Greece’s sovereign debt, which remains at 175% of GDP despite earlier restructurings, looks unsustainable. Further bilateral talks may well result in some form of further restructuring or moderation in austerity requirements, but declaring a unilateral default and following through on earlier threats to leave the Eurozone would have drastic consequences for all negotiating parties. The Greek government would immediately have to balance its budget as both foreign credit and aid were cut off, presumably without EU transfers that totaled €5.4 billion in 2014 (3% of GDP). The banking sector would likely collapse without emergency liquidity from the ECB. Credit would dry up given the damage to local banks and doubts about credit worthiness. Trade would also collapse as the value of a new currency would be uncertain. Meanwhile, the troika wants to protect existing loans to Greece, discourage other countries from trying to renege on debts, and insulate Eurozone banks that retain exposure to either Greek public or private sector loans.

Markets have thus far taken the halting negotiations in stride. Few investors have direct exposure to Greece. Roughly 70% of the country’s €315 billion in debt is owned by official sector creditors like the European Financial Stability Facility; domestic creditors like Greek banks own much of the remainder. Greek equities already have returned -53% over the past 12 months and are now just 0.4% of the MSCI EM Index. Yields on sovereign bonds from other peripheral borrowers remain near historical lows and the euro’s recent sell-off against the US dollar is more the result of the ECB’s expanded QE than it is concern about Greek debt levels. European equity markets, boosted by the ECB announcement and tailwinds of the cheaper euro for profits, are among the best performers globally year-to-date.

Of course, market sentiment may sour if negotiations become more contentious and it appears no deal will be reached by the new deadline. Market participants would start to look at direct casualties from deeper Greek distress, which could include Greek corporates with euro-denominated debts and Eurozone banks with large Greek exposures. Sovereign bonds from peripheral countries may be insulated given the ECB’s commitment to expanded QE, but speculators would shine a light on weaker credits from peripheral countries that would be vulnerable to higher borrowing rates or worse. However, we believe much of the initial volatility would pass given the power of the backstops in place. Other peripheral countries have lower debt levels and numerous incentives to remain members of the Eurozone; it is also worth remembering that Ireland, Portugal, and Spain are expected to see much stronger growth in 2015 than “core” peers. If Greece followed through on its earlier threats of “Grexit,” the ensuing volatility could be significant but actually strengthen what remained of the Eurozone, by serving as a significant warning to other countries contemplating similar steps.

Wade O’Brien is a Managing Director on the Cambridge Associates Global Investment Research team.