Asian stocks gained and the euro steadied on Monday after Europe took a step towards fiscal union, but caution may return as EU leaders failed to stem anxiety over whether their fragile safety net is sufficient to stop the debt crisis from spreading.
Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.
A Reuters report that China planned a new $300 billion (191 billion pounds) vehicle to invest in Europe and the United States also buoyed investor sentiment, boosting U.S. stocks on Friday.
There was some progress made in Europe, such as having an accord on funding, which helps negative sentiment to recede and risk-on mood to return, said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.
The fact that the IMF was involved and China was reportedly planning to invest in Europe shouldn't be overlooked either, as having global lenders' interested in Europe was also a focal point in gauging the progress in the debt crisis, he said.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.7 percent on Monday, after sliding as much as 2.8 percent on Friday for a weekly drop of 3.5 percent on concerns over the EU summit's outcome. Japan's Nikkei stock average <.N225> opened up 1.4 percent.
The euro was resilient at $1.3370, barely changed from New York levels, but off Friday's high of $1.3434.
While bilateral loans to the IMF would help beef up its resources to help struggling euro zone economies when needed, the volume at the euro zone's bailout fund was still seen insufficient to safeguard core euro zone economies from the contagion of the debt crisis.
The capacity at a permanent bailout fund was capped and it was not granted a banking licence, limiting its resources.
That will keep intense pressure on the European Central Bank to take on a role of the lender of the last resort to help resolve the debt crisis, which has intensified credit contraction in the euro zone.
Officials also gave a guarded assessment to the result of the EU summit, with IMF chief economist Olivier Blanchard saying an agreement reached by European countries for deeper economic integration was a step in the right direction but not a complete solution for the euro zone's debt crisis.
Financial strains are unlikely to ease significantly until the funding scheme is strengthened further, as worries about banks' exposure to euro zone sovereign bonds have made them reluctant to lend dollars to each other.
European sovereign debt yields also stayed vulnerable, with yields of highly-indebted countries such as Italy and Spain barely contained by ECB buying in the secondary market.
Italy and Spain are scheduled to issue new debt this week and their borrowing costs are likely to continue to rise.
Rising borrowing costs, in turn, will make it difficult to pursue fiscal discipline.
Easing risk aversion helped firm Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by several basis points early on Monday.
(Editing by Alex Richardson)