NEW YORK SHARES

Source: MarketWatch

SYDNEY -- Asian shares mostly fell Tuesday, giving back much of the steep gains made in the previous session, as initial euphoria over Spain's bank bailout gave way to uncertainty over the details.

With Wall Street equities tumbling overnight, Japan's Nikkei Stock Average fell 1.7 percent and South Korea's Kospi lost 1.3 percent, although Australian investors returned from a three-day weekend to push the S&P/ASX 200 index up 0.3 percent.

Japanese stocks had gained two percent Monday, while South Korean shares climbed 1.7 percent, after weekend news that Spain's banks could accept up to €100 billion (US$125 billion) in aid.

Opening later, Hong Kong's Hang Seng Index dropped 1.1 percent -- a day after it soared 2.4 percent on the Spanish boost -- and the Hang Seng China Enterprises Index lost 1.3 percent. Over on mainland China, the Shanghai Composite Index shed 0.6 percent.

European and US stock markets closed lower Monday as investors fretted about the finer points of the proposed aid package, pushing yields on Spanish bonds higher.

"Spain's bailout has opened a debate about the position of private-sector bondholders in the pecking order if Spain one day defaults. If Spain gets funds from the [European Stability Mechanism], then private bondholders are subordinate to European institutions," said Kathleen Brooks at Forex.com.

RBC Capital strategists said that the news of the bailout also raised other questions, such as the likely reaction of ratings agencies.

"The loans will add directly to the Spanish government's liabilities and so increase the debt-to-GDP ratio by around 10 percent, leaving further downgrades likely," they said.

Global growth concerns, meanwhile, sent benchmark US crude futures below $83 a barrel for the first time since October. As a result, energy firms were among the worst performers in Japan on Tuesday.

European concerns sent the euro falling below the ¥99 mark after spending much of the previous Japanese stock session above ¥100, with the move hurting exporters with large EU exposure.

The pain was felt in Seoul as well, with LG Electronics Inc. falling 2.3 percent and Samsung Electronics Co. losing 1.2 percent.

Large miners fell in Australia, reversing gains seen at the end of last week, with BHP Billiton Ltd. down 1.1 percent and Rio Tinto Ltd. falling 1.4 percent.

However, shares of Qantas Airways Ltd. jumped 6.9 percent after an Australian Financial Review report that the airline is preparing efforts to defend against a possible hostile takeover.

Read More: Asia stocks retreat as Spain optimism fades

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If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.

The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.

Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.

In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.

In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.

The simple fact is that Europe some time ago ceased having a true monetary union. Although no country has withdrawn from the euro, markets have quit treating it as a trusted, common currency. As Irish economist Colm McCarthy writes: “Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities.”

At an event jointly hosted by the Atlantic Council and Germany’s Suddeutsche Zeitung on Friday, IMF chief Christine Lagarde worried about political cycles running behind economic and market cycles, as “a movie we have watched one too many times.”

It looks something like this. Tensions escalate and, out of necessity, policy makers take action. But just enough for the danger to subside. Then the urgency is lost, momentum wanes, then the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.

But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.

Markets tell politicians what they don’t want to hear. Economist Jean Pisani-Ferry says bond markets won’t be convinced until they see Europe has a banking union (Europe-wide banking supervision, deposit insurance, and crisis resolution), sufficient tax pooling (so that EU-level institutions can take charge of financial stability), and mutualization of enough of the costs of the crisis to convince markets that their bets against the euro are in vain.

Markets will continue to test Europe’s leaders until they are convinced they are committed to correcting their system’s flaws. And resisting markets is like complaining about the rain, and this one is a deluge. Global markets have a weight that no one anticipated when the Maastricht Treaty created the single currency in 1992.  Since then, global financial stock has quadrupled through 2010 to $212 trillion, from $54 trillion in 1990, according to the McKinsey Global Institute. More stunning yet, Lagarde says the total amount of outstanding OTC derivatives in 2011 was $648 trillion in 2011, compared with just $12.1 trillion in 1992.

Josef Ackermann, former Deutsche Bank chief executive and now chairman of Zurich Insurance Group, said at the Atlantic Council last week that markets have done Europe a favor by forcing upon it financial and structural reforms and greater discipline. “There’s no politician who stood up and said we have to change that – not one,” he said. Without markets shifting credit spreads, he believes Greek profligacy would have gone on for some more years. “We’ve completely changed the discipline of European countries going forward, and that’s a good thing.”

Beyond that, however, he says politicians need to do much more to convince voters of Europe’s value. “A fragmented Europe has no way for self-determination,” he warned. “We will have to accept what the United States, China, India, Brazil and other countries [dictate to] us. This cannot be the future of our children.”

If Europe manages this crisis successfully, Ackermann argues, it will instill a new self-confidence that will express itself globally as Europe jointly conquers a historic challenge. Conversely, it follows that failure could dramatically reduce Europe’s influence and unity for at least a generation to come.

PHOTO: A demonstrator hangs fake Euro notes on her leg during a protest against Spain’s bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. REUTERS/Jon Nazca