Excitement over the euro zone's mammoth $1 trillion rescue package gave way on Tuesday to doubts whether its weakest economies can meet their end of the bargain and deliver drastic debt cuts, driving the euro and stocks lower.
The emergency plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- impressed markets with its sheer size and sparked a spectacular rally in world stocks and the euro.
Yet financial markets turned cautious when they reopened for business in Asia on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area.
In a sobering note, the International Monetary Fund said that even though Greece's public debt was sustainable over the medium term, the nation whose debt woes spurred the unprecedented euro zone action, faced plenty of risks.
Moody's credit ratings agency also warned it might downgrade Portugal's debt rating and further cut Greece's to junk status, noting the contagion effect of Greece's crisis on other euro zone members.
Contagion has spread from Greece -- historically a weaker credit in the context of the euro zone -- to sovereigns with stronger credit metrics like Portugal, Ireland and Spain, Moody's said.
MORE PROBLEMS AHEAD?
Stock markets started with modest gains, but turned negative with Tokyo shares down 0.9 percent and markets elsewhere in Asia-Pacific down 1 percent, a far cry from a nearly 4 percent jump in Wall Street blue chips overnight.
The euro slipped 0.5 percent against the yen and traded 0.2 percent down from late U.S. trade against the dollar after it climbed as much as 3 percent on the rescue news.
Even though one of the worst scenarios -- a Greek default -- has been avoided for now, in many ways solving the bigger problems have simply been postponed and new issues could emerge in places such as Portugal and Spain, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.
In another sign of market caution, safe-haven U.S. Treasuries stabilized in Asian trade after Monday's plunge.
Markets initially cheered the rescue plan as a sign that for the first time in the six months of a deepening debt crisis, European leaders appear to have got ahead of the curve with decisive action.
But the deal left many longer-term questions about whether Europe's weakest economies can manage their debt and how the European Union can develop more coherent economic and fiscal policies to underpin the single currency.
With many nations saddled with record deficits after they pumped trillions of dollars into their economies during the global crisis, officials from Washington to Beijing applauded Europe's efforts to keep the crisis contained within its bounds.
In Japan, the world's most indebted industrialized nation, government officials warned Tokyo could no longer take investors' willingness to bankroll its spending for granted.
Japan so far has had no trouble financing its deficits, even as its public debt is forecast to reach 200 percent of GDP within a year or so, thanks to a vast pool of domestic savings and reliance on domestic investors to foot the bill.
But this could change, Strategy Minister Yoshito Sengoku warned, saying financial markets may start taking note of Japan's debt burden, while Finance Minister Naoto Kan said next year's new borrowing should not exceed this year's new bond sales.
Japan needs to draw a lesson from Greece's problems and to take steps on fiscal discipline with a stronger sense of crisis than before, he told a news conference on Tuesday.
European leaders sprung into action and cobbled together a package that dwarfed the 110 billion euro rescue for Greece after interbank lending started freezing up on Friday in an ominous reminder of the Lehman crisis.
With memories still fresh of how the U.S. subprime market's collapse spiraled into a global financial and economic crisis, Europe acted out of concern that after pummeling profligate Greece, markets could take aim at other fiscally weak nations, threatening the stability of the whole euro area.
Concerns that credit markets could freeze again also appeared to have forced the European Central Bank's hand, which joined the rescue with a pledge to buy government bonds -- a nuclear option it had resisted for months.
Euro zone central banks immediately began implementing the ECB's part of the deal, buying government bonds in the open market.
The move impressed analysts just as much as the size of the 750 billion euro package of standby funds and loan guarantees that could be tapped by euro zone governments shut out of credit markets.
That amount includes 250 billion euros that the IMF could contribute, even though its No. 2 official John Lipsky said his institution had not earmarked any money for euro zone countries and help would be provided on a case-by-case basis.
Fears that the crisis could spread well beyond Greece, helped overcome initial resistance in Germany and other nations to a bailout after Athens had for years misled its EU peers about the true state of its finances.
This package serves to strengthen and protect our common currency, German Chancellor Angela Merkel told reporters in Berlin.
Germany and the Netherlands, sticklers for budget discipline, insisted the rescue program was linked to the same kind of draconian austerity measures already imposed on Greece.
Dutch Finance Minister Jan Kees de Jager told parliament Spain and Portugal had made a commitment to cut their budgets substantially in 2010 and 2011 as a condition for the safety net. EU Monetary Affairs Commissioner Olli Rehn said both states must commit themselves to further savings this year too.
Spain said it had no intention of drawing on the funds.
(Additional reporting by Elaine Lies, Masayuki Kitano, Leika Kihara and Walden Siew in New York, writing by Tomasz Janowski; Editing by Neil Fullick)