The euro steadied after an initial jump and European stocks eased on Tuesday after the agreement of a second bailout deal for Greece removed the threat of a disorderly default but left markets fearing further problems ahead.
After 13 hours of talks, euro zone ministers finalized measures to cut Greece's debt to 120.5 per cent of gross domestic product by 2020, securing its second rescue in less than two years and allowing it to meet a bond repayment due next month.
The euro initially jumped over half a cent against the U.S. dollar to a two-week high of $1.3293 on news of the deal, before stabilizing in early European trading at around $1.3270, about 0.2 per cent higher.
"For now the Greek deal arguably has diverted rather than averted disaster," said Richard McGuire, senior fixed income strategist at Rabobank.
The major concerns are that the austerity measures imposed on Greece will severely weaken its already shrinking economy, making it harder to repay its debts. The sharp cuts in the value of bonds held by private sector creditors also mean it will be hard for the country to borrow from the capital markets again.
Yields on Spanish and Italian bonds, seen a measure of risk for other peripheral euro zone nations, fell on relief that Athens had sealed a bailout deal, but Portugal's debt came under pressure on fears it would be the next in line after Greece.
"We are concerned that the Greece deal will act, via its restructuring, as a template rather than a one-off solution and the market will speculate that Portugal is set to go down the same route," McGuire said.
The yield on 10-year Italian debt fell 5 basis points to 5.43 per cent, its lowest level since early October. Yields on Portuguese debt with a shorter two-year maturity rose sharply, up 55 basis points to 13.93 per cent, reflecting concerns it may need to follow Greece.
Reaction in the share and commodity markets was similarly cautious after rallying in recent days in anticipation of a Greek rescue deal and with easier monetary policy stances from China and other central banks boosting demand for risk assets.
"The bailout bandage is on, but it won't take much to unravel," said David Miller, a partner at Cheviot Asset Management.
"The lack of economic growth in peripheral Europe and structural imbalances are slowly being mixed into the crisis."
European stocks, which hit seven month highs on Monday ahead of the deal, edged down 0.1 per cent to 1090.88 points, while the MSCI world equity index was little changed.
"Until we can see a path to growth (in Greece), there will be a draining away of the confidence that was coming back into the market. People will take a defensive posture in terms of stocks," said Justin Urquhart Stewart, director at Seven Investment Management.
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The commodity-linked Australian dollar fell 0.4 per cent to $1.0708 after the Greek deal was sealed, and gold inched up 0.4 per cent to $1,740.35, after touching a one-week high of $1,740.49.
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Brent crude oil futures [[entity]]rude oil futures [[/entity]]L-FT held steady near $120 a barrel with prices expected to be supported as western sanctions bite into oil supply from Iran, OPEC's second largest producer.