Europe struggled on Tuesday to shake off doubts that it can emerge from its debt crisis as jitters returned to world markets despite the creation of a giant financial safety net to shore up the euro.
A day after an EU-IMF one trillion dollar support scheme sparked market euphoria, shares in the United States, Asia and Europe fell and the euro faltered amid worries that Greece and other debt-burdened countries will not carry out tough austerity measures.
In Athens, the epicentre of the crisis, the Greek government asked the European Union and International Monetary Fund for a first tranche of 20 billion euros (26 billion dollars) from a 110-billion-euro bailout package to help it make debt payments this month, a finance ministry source said.
On Monday, Athens ordered a radical overhaul of the country's costly pension system that it had warned faced collapse. But unions vowed to oppose the plan, which would see an average pension cut of seven percent by 2030.
In Berlin, the cabinet approved Germany's part in a separate 750-billion-euro (one trillion-dollar) EU-IMF package agreed to prevent the Greek crisis from spreading to other weak eurozone economies.
After massive gains on Monday, stock markets slumped on Tuesday as the gloss came off the deal.
"The optimism from the one-trillion-dollar euro-area financial rescue package is dissipating as the focus shifts to the difficult fiscal changes that debt-ridden eurozone nations will have to implement to move toward long-term sustainability," Charles Schwab & Co. analysts said in a note to clients.
The London, Frankfurt and Paris markets were all down sharply for most of the day but steadied towards the close in line with Wall Street.
In Asia, Tokyo, Sydney and Hong Kong all closed down by more than one percent.
The euro, which briefly jumped above 1.30 dollars on Monday, fell back just under 1.27 dollars in European trade on Tuesday. The interest rate paid on Greek 10-year debt rose to 7.3 percent from 6.7 percent on Monday.
Major governments expressed optimism that the 750 billion euros set aside by the European Union and IMF had ended the risk of a new debt crisis enveloping the global economy.
Angel Gurria, head of the Organisation for Economic Co-Operation and Development, said the package was credible and "the right size."
But the IMF warned that European levels of government debt have hit danger levels and vigorous action will be needed to get them down.
Radical short term action had to be avoided as it risked "a relapse into recession," said the IMF in a report on Europe.
"However, sustainability indicators are flashing warning signs over public debt levels in most countries and sizable (fiscal) consolidation efforts are needed in the medium-term," it said.
"For countries with already low fiscal credibility, more immediate consolidation is a must," it said, warning that the recovery in Europe is particularly weak when compared with other regions and that traditional growth sectors may not be as strong as previously.
European Commission president Jose Manuel Barroso stressed that the EU would not be content at just throwing money at the problem without tackling the root causes.
"It's not just about giving money, it's about asking members states or the eurozone to make additional efforts for the correction of some imbalances that still exist," he said.
In another move to bolster the troubled eurozone, the European Commission will propose on Wednesday much stricter control of national budgets, with tougher penalties for fiscal indiscipline.
Market and analyst doubts have grown as everyone waits for Greece to take promised action to cut its 13.6 percent public deficit and for Portugal and Spain to announce further measures to slash spending.
"As the dust settles from (Monday's) 'shock and awe' bailout package from the eurozone, the realisation that this is a sticking plaster to a much deeper rooted problem has slowly permeated through and the euro has given up most of (Monday's) gains," said CMC Markets analyst Michael Hewson in London.
He said that an announcement by Moody's ratings agency that it may cut Greece and Portugal's ratings shortly also "weighed heavily on the euro."
Meanwhile Japan announced that it will limit the amount of debt it issues in the next fiscal year given heightened market sensitivity.
"Everybody is growing sensitive to sovereign risk" after Greece's debt crisis rocked global markets, Japanese Finance Minister Naoto Kan said.