Markets reacted skeptically on Monday to a record 110 billion euro bailout for Greece, with investors doubting it would offer more than temporary relief to a euro zone shaken by divisions and saddled with high debt.
Despite Sunday's agreement by European finance ministers on an unprecedented three-year loan package, the euro fell as markets questioned the ability of the Greek government to push through new austerity measures pledged in exchange for aid and worried other euro states may be vulnerable.
In contrast to the euphoria that greeted past IMF rescues, Greek bond yields eased only slightly compared to benchmark German bunds, falling back to levels reached 10 days ago before last week's market panic over a possible Greek default.
The high yields will no longer affect Athens' borrowing costs since euro zone partners and the International Monetary Fund will effectively cover Greek credit needs for the next three years at far lower rates of 5 percent or less.
The yield spreads of Portugal and Spain, seen as the next targets of the markets if the Greek plan fails to calm investor jitters, also narrowed modestly.
There's a lack of conviction that this is the silver-bullet solution. The longer-term sustainability of this level of austerity has got to be open to question, said Tony Morriss, senior currency strategist with ANZ Bank in Sydney.
Euro zone leaders will launch the first bailout of a member of the 16-nation single currency area on Friday and hope to have secured parliamentary assent for national contributions by then.
The German government, which took the hardest line against a bailout after the Greek crisis erupted late last year, approved a draft law on Monday on Berlin's 22 billion euro contribution to the emergency loans -- the biggest of any EU state.
Chancellor Angela Merkel said after the cabinet decision that Germany was stabilizing the euro as a whole, and launched a media blitz to try to convince skeptical Germans.
She hopes to secure the backing of both houses of parliament on Friday, two days before a crucial regional election where voters could punish her party for agreeing to the bailout.
To secure the aid deal, Athens committed itself to further radical savings -- mostly on public sector wages and pensions -- on top of three previous austerity plans that have already sent thousands of people into the streets in protest.
Greece's main public sector union, which represents about half a million employees, condemned the deal and said it would stage a 48-hour walkout starting on Tuesday, instead of the one-day strike it had previously planned for Wednesday.
I have 5 children, I work all day and I make 1,020 euros net a month. The measures are cruel and inhuman, people cannot stand it any more, they will revolt, said Sampsanis Ioannis, a 49-year old doctor who works in a Greek state hospital.
The center-left daily Ethnos said the plan would mean five years of asphyxiation for the Greek people and a violent modernization for the economy, which is forecast to contract by 4.0 percent this year and 2.6 percent in 2011.
Even if the plan is fully implemented, it will leave Greece with a substantially higher debt mountain of nearly 150 percent of national output in 2013 and a significantly smaller economy to pay it off. Deflation could further hamper debt reduction.
Yet the Greek and euro zone finance ministers, European Commission and IMF officials insisted there had been no talk of restructuring Greece's debts -- a standard IMF prescription when a country's liabilities become unsustainable.
Many investors suspect debt restructuring will come later, making private bond-holders share the cost.
You cannot solve a problem of too much debt and too much spending with more debt and more spending. It defies comprehension, said U.S. investor Jim Rogers, who co-founded the Quantum Fund with George Soros in the 1970s.
Asked whether Greece would default, Rogers told BBC Radio 4: I doubt it in 12 months' time, there is too much money being thrown at them right now. Can they default in five years? Yes, and they probably will.
ECB EXTENDS LIFELINE
The European Central Bank extended a new lifeline for Greece on Monday by suspending its minimum credit rating threshold on Greek sovereign debt, meaning Greek bonds will remain eligible as collateral in ECB lending operations.
The decision effectively neutralized a controversial move by credit rating agency Standard & Poor's last Tuesday to downgrade Greece's sovereign rating by three notches to junk grade.
Austrian Finance Minister Josef Proell said his euro zone colleagues had agreed to ask banks not to reduce their exposure to Greek borrowers for the duration of the rescue and avoid calling in loans or cancelling credit lines.
In addition, ministers are to ask their national banking sectors to make voluntary contributions to the bailout.
German Finance Minister Wolfgang Schaeuble planned to meet with the country's top bankers, including Deutsche Bank CEO Josef Ackermann, on Tuesday to discuss private sector help for Greece, sources told Reuters.
Economists have said that if the emergency aid fails to win over skeptical investors, European countries could end up footing a bill of half a trillion euros ($650 billion) to save other fiscally weak nations.
The euro, which analysts had expected to rally in relief at the bailout, fell to $1.3190 by 1630 GMT, down from $1.3295 on Friday. The single currency has lost nearly 12 percent since a December high above $1.50 at the start of the Greek crisis.
FATTEST CHEQUE IN HISTORY
Mass circulation newspaper Bild reflected popular outrage in Germany at the bailout with the headline: Broke Greece gets the fattest cheque in history. But other German media endorsed the rescue as a necessary evil to preserve the euro.
Merkel's reluctance to commit to aid has been blamed for fuelling market panic and increasing the cost of the rescue.
Crucially, the aid would be released in time for Athens to make an 8.5 billion euro debt repayment to creditors on May 19.
(Additional reporting by Kevin Plumberg in Hong Kong, George Georgiopoulos in Athens, Boris Groendahl in Vienna, and Sarah Marsh, Madeline Chambers and Paul Carrel in Berlin)
(Writing by Paul Taylor and Noah Barkin)