Relief over the passing of austerity measures by the Greek parliament saw bank shares lead European stocks higher on Monday, while the euro also gained even though more steps are needed before the shadow of a messy debt default can be lifted.
Greece must still detail how a further 325 million euros ($428.6 million) of spending cuts will be reached, and give binding assurances the full plan will be implemented before when euro zone finance ministers meet on Wednesday to decide on whether to grant a new 130 billion-euro bailout.
A Greek agreement for austerity was always going to be short term positive for the euro, said Paul Robson, currency strategist at RBS.
The euro was up 0.8 percent at $1.3280, recouping some of the losses made on Friday and about a cent below a two-month high of $1.3322 hit last week.
We will see a fair degree of two-way price movement in the euro until Wednesday when the finance ministers' meet and we have to see whether what Greece has agreed to is sufficient enough for its creditors, Robson said.
Highlighting the fragile state of relations between Greece and its creditors Germany's finance minister, Wolfgang Schaeuble, said in an interview with a German newspaper that Greek promises on austerity measures are no longer good enough because so many vows have been broken.
Share markets also took the progress on the Greek austerity package as a positive sign after fears the deal could unravel sent markets around the world lower at the end of last week with the S&P 500 index suffering its biggest loss of the year on Friday.
The FTSEurofirst 300 <.FTEU3> of top shares, which fell 0.9 percent to a one-week low on Friday, was up 0.75 percent at 1072.22 points.
The index was led higher by the banking sector with euro zone banks exposed to debt-laden peripheral countries, such as Commerzbank
The broad MSCI All country World Index <.MIWD00000PUS> was up 0.6 percent at 325.80.
DEBT MARKETS CAUTIOUS
In debt markets the recovery in risk appetite meant Italian an Spanish bond yields fell but debt investors were also eyeing a heavy week of fresh issuance with Italy, France and Spain set to auction new bonds this week.
Italian 10-year yields fell 11 basis points on the day to 5.53 percent, squeezing the premium demanded by investors to hold such debt instead of safer German bonds by seven basis points to 356 basis points. Equivalent Spanish yields fell six basis points to 5.29 percent.
Debt investors will also be watching for the outcome of talks to get private creditors of Greece to agree to write down the value of their holdings. Uncertainty still looms large over whether the necessary near 100 percent acceptance can be achieved without triggering a credit default.
In the meantime, concerns are mounting that hedge funds may have built up sufficiently large holdings of Greek bonds to scupper voluntary bond swap deals.
Elsewhere news that Japan's economy shrank by a more-than-expected 0.6 percent in the fourth quarter compared with the previous three months has increased speculation of a policy easing.
The Bank of Japan began a two-day meeting on Monday, however its key policy rate is already close to zero in and it has created a 55 trillion yen ($708 billion) through an asset buying and lending program, leaving it with limited firepower.
The yen eased briefly on the speculation of more easing by the Bank of Japan but against the dollar was flat at 77.65 yen, just below a two-week high of 77.81 yen hit on Friday.
Crude prices rose above $1 on Monday, supported by a weaker dollar and expectations of a revival in demand growth, with front-month Brent crude futures up more than $1 to
($1 = 0.7582 euros; $1 = 77.6400 Japanese yen)
(Additional reporting by Anirban Nag Editing by Jeremy Gaunt and Toby Chopra)