The market rally that followed last week's Greek bailout could be short-lived, say financial analysts.
They claim the package proposed by eurozone finance ministers fails to tackle the underlying problems and sets a dangerous precedent in permitting a country to default.
Simon Ballard, senior credit strategist at RBC Capital Markets, warned: "The fact that the European leaders appear to have conceded that a selective default by Greece could now be allowed to happen, given the demands for private investor involvement, could yet come back to bite us."
Financial institutions holding Greek government bonds are being asked to sustain losses averaging 21 per cent – meaning they will receive back only ¤79 for each ¤100 invested. That will cost private banks and insurance companies at least ¤37bn (£33bn), and they warn that the loss may discourage them from future investment that could provide essential jobs and economic growth.
William Porter, at Credit Suisse, warned: "While EU funds are useful, a necessary condition for restarting growth is the re-establishment of private-sector capital flows. The plan offsets what we estimate as 10 months' deterioration in the fiscal balance, but leaves that key issue untouched."
The meeting of finance ministers on Thursday followed weeks of argument over how to solve Greece's financial problems. The Athens government spends more than it receives in tax revenues and was unable to redeem its ¤350bn loans as they fell due – or to borrow more. The solution agreed by EU ministers is a further ¤109bn bail-out from European government bodies, but with private investors expected to accept losses.
Markets rose on Friday with share prices higher around the world, while borrowing costs fell in Greece – down from 18 to 14 per cent – and other troubled European countries, notably Italy and Spain. But Mr Ballard said: "We would be cautious about chasing this near-term rally too aggressively." He warned that the combination of Greek default, the risk of the US losing its triple A credit rating and the fragile global economy mean the problems may not yet be over.
"The eurozone heads have not delivered a silver bullet to the sovereign-debt situation," he said. "Many questions remain. Some significant political, fiscal and monetary challenges will have to be faced up to in the days and weeks ahead, not least of which will be ratification by all member states of what was proposed."
Finland is one country that has stated its reluctance to bailing-out Europe's over-borrowed southern peripheral nations. France and Germany only last week reconciled previous deep differences on the solution required.
Despite a ¤40bn package of spending cuts and a ¤50bn privatisation programme, Greece will still be running a budget deficit. Gregg Gibbs at Royal Bank of Scotland said: "Even with these significant steps, the periphery still needs to get itself on a sustainable path towards debt reduction. Greece still remains the most vulnerable, and meeting the IMF austerity targets and asset sales that it has been set will be difficult."
Eurozone ministers hoped that by producing a solution for Greece's problems they might have stopped the contagion spreading to other countries, but the markets still think problems could arise elsewhere. Mr Porter said: "This was a Greece-driven entry point, but there may well be others." He warned of a summer of lightning strikes that could put pressure back on the single currency.
Greg Gibbs, a currency strategist at Royal Bank of Scotland, said: "Growth in the European economy has waned, and the periphery is the weakest link."
There is concern that rather than stop the contagion, the eurozone ministers have made other defaults easier. David Simner, Fidelity International's eurobonds portfolio manager, says: "The Rubicon has been crossed in that writedowns of sovereign bonds have been permitted and extra writedowns will be less difficult in future."
Private investors are also being expected to take a further ¤12bn loss by selling bonds back to the Greek government for less than their face value, and loans that were due to be redeemed in the near future will not now be repaid for up to 30 years.
In addition to the ministers' ¤109bn for Greece, other countries in the single currency have agreed to support Athens until it can return to the financial markets unaided. However, Mr Ballard said: "Cynics may suggest this could potentially put European taxpayers on the hook for funding Greece for years to come."
The bail-out proposals have been described by some as a Marshall Plan after the US-funded package to stimulate European economies following the Second World War. However, the phrase was removed from the final communiqué because it evoked memories of the Greek civil war, according to bankers in Athens.
But Mr Porter states: "This is not a Marshall Plan – and not just because we have to call it something else. The genius of that plan was to step away from the bookkeeping and, rather than calling for growth, to put in place the conditions where it could take place – and sort out the money later."