NEW YORK (TheStreet) -- Stocks bounced back on Tuesday as investors bet the Federal Reserve will delay its looming rate hike as Greece moves closer to default. 

Reports suggest German Chancellor Angela Merkel won't negotiate any last-minute debt deal with Greece before Sunday's referendum. That makes a default all the more likely. 

The S&P 500 rose 0.58%, the Dow Jones Industrial Average gained 0.41% and the Nasdaq increased 0.75%, following a major selloff in all the indices on Monday. The Dow lost 350 points on Monday and entered negative territory for the year.

Former Fed Gov. Larry Lindsey told CNBC that central bankers will point to the drama in Greece as a reason to push its looming rate hike further down the road. 

The debt-laden country has a $1.7 billion payment due to the International Monetary Fund at midnight Tuesday Athens time, and reports are that Greece won't make the payment, though Greek Finance Minister Yanis Varoufakis told Reuters he is hopeful a last-minute agreement will be made.

Greece announced over the weekend that it will hold a referendum on July 5 to allow citizens to decide if the country should remain in the 19-country eurozone. A "Grexit" would mean a return to Greece's old drachma currency.

Investors in Europe weren't optimistic about a Greek resolution, with London's FTSE 100 wrapping up Tueday's session to the downside by 1.1%. The euro lost 0.80% against the dollar.

"Unless there is a last ditch agreement [Tuesday] between Athens and the creditors to extend the bailout program by five months (with partial debt relief or a commitment hereto), [Monday's] recovery in euro assets is likely to prove fleeting," wrote Societe Generale's Kenneth Broux in a note. "The probability of a deal happening is low and means Greece will fall in arrears with the IMF today if it does not honor the repayment."

Greece isn't the only place with a debt crisis on its hands. Puerto Rico's Gov. Alejandro Garcia Padilla said on Sunday that the U.S. commonwealth's $72 billion in debt is "not payable," posing risks for the U.S. municipal bond market. The White House said a bailout for Puerto Rico was not being considered.

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