Markets saluted a euro zone deal on a huge standby rescue package for Greece, slashing the debt-laden country's borrowing costs and buying its stocks and bonds on Monday as fears of a near-term default dissipated.
But unanswered questions remained over whether Greece would have to use the bailout fund, how it would be activated, and how the weakest of the single European currency's 16 members would cope with its 300 billion euro debt mountain in the longer term.
The euro rose, the yield on short-dated Greek bonds fell by over a point to around 5.9 percent and the cost of insuring Greek debt against default narrowed dramatically from Friday's close as markets were impressed by the bigger-than-expected EU rescue plan.
"It's almost a market that's in disbelief that we've seemingly got a solution to this problem," said Sean Maloney, a rate strategist at Nomura.
But a German government spokesman raised a potential hitch by saying European leaders would have to agree at a special summit to activate the aid mechanism, in which Germany would be the biggest contributor with 8.4 billion euros ($11.4 billion).
That contradicted statements by the head of the Eurogroup of euro zone finance ministers and the European Commission that a decision by the ministers would be sufficient and could be taken by teleconference like Sunday's deal on the rescue plan.
The euro slipped slightly from 1.3610 to 1.3590 after the German spokesman's comment, while yields on Greek debt were little changed.
A European Commission spokesman contradicted him, telling reporters: "No. We do not have to organize a big summit here in Brussels. As you saw yesterday, the euro group can activate itself in a very quick, effective… way."
"The support package for Greece … should ensure that it is able to meet its financing needs over the next year or so, but it does not guarantee Greece's long-term solvency," said Ben May of Capital Economics in London.
The yield on the country's 12-month T-bill plummeted some 268 basis points to 5.28 percent, suggesting the threat of a near-term default had been lifted.
Euro zone finance ministers agreed on Sunday on a 30 billion euro package of three-year loans at interest of about 5 percent, if Greece requests help, with the International Monetary Fund expected to supply a further 15 billion euros in the first year.
The deal, which would be worth 45 billion euros in the first of three years, with more to be negotiated later, could amount to the biggest multilateral financial rescue ever attempted, dwarfing past IMF programs for Mexico and Argentina.
The existence of a detailed standby plan, even if Greece has not decided to invoke it, should help Athens auction a planned 1.2 billion euros in T-bills on Tuesday.
"Three-, six- and 12-month T-bill yields have come down to around 4.5 to 5.5 percent from 7.0 – 7.5 percent on Friday. There have been trades at both the bid and the offer. Yields at tomorrow's T-bill auction should be in this area," said a senior dealer at a Greek bank.
NO ILLUSION
However, Greek policymakers and media were under no illusion that a short-term boost might not be enough to prevent the country having to seek a bailout in the longer run.
"It offers a sigh of relief … but it doesn't solve our problems," the center-left daily Eleftherotypia, which supports Prime Minister George Papandreou, said in an editorial.
"The country is heavily indebted and has to lower its debt if it wants to survive in the long term."
Papandreou is implementing tough austerity measures designed to cut the budget deficit by four percentage points to below 9 percent of GDP. But Greece's debt mountain, equivalent to 125 percent of annual economic output, is set to continue rising.
IMF managing-director Dominique Strauss-Kahn told an Austrian magazine the only solution for Greece in the longer-term was a period of deflation, in which wages and prices have to fall to regain competitiveness.
The agreement on a specific, detailed rescue plan with interest rates significantly below last week's market rates represented a political climbdown by Germany, Europe's biggest economy and main paymaster, which had demanded market rates.
The risk premium that investors charge for holding Greek debt rather than benchmark German bunds immediately narrowed when markets reopened on Monday by some 60 basis points to 334 basis points, its tightest since late March.
The Athens bourse's banking index (.FTATBNK) rose 8.2 pct, beating the broader Greek equity market's (.ATG) 4.61 pct advance. Greek bank stocks have lost 20.1 percent this year.
Traders had dumped Greek bonds and shares, especially in banks, in a growing market panic last week amid doubts about the availability of a euro zone rescue due to opposition in Germany.
Greece needs to borrow some 11 billion euros by the end of May to refinance maturing debt and interest charges. A senior finance ministry official said Greece would go ahead with a road show in the United States at the end of this month to promote a dollar-denominated bond.
A successful return to the markets after last week's fright would enable Athens to delay any request for aid at least until after a key German regional election on May 9, seen as a major political test for Chancellor Angela Merkel.
