European policy makers have avoided a financial crisis by flooding the market with cash, but they haven't addressed economic hardship on the ground, Kelly said. In granting Cyprus' emergency rescue, for example, lenders demanded economic reforms, debt payments and a banking overhaul that will result in heavy losses for bank bondholders and shareholders. In addition, people with more than 100,000 euros in their accounts will lose up to 40 percent of their deposits.
Kelly said that's tough to swallow for people facing high unemployment and government cutbacks in Greece, Italy, Spain and other countries that received bailouts.
"If they're going to end up broke anyway," Kelly said, it will be "harder and harder for people to make the sacrifices that Europe is demanding of them." That could lead voters in bailed-out countries to resist lenders' terms, increasing political and economic instability in Europe and weighing on global markets, he said.
That concern intensified Monday after a key official indicated that the Cyprus rescue may serve as a model in other nations with struggling banks.
"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," said Jeroen Dijsselbloem, who chairs meetings of finance ministers from nations that use the euro, in an interview with the Financial Times and Reuters. Dijsselbloem's office confirmed the remarks.
Wall Street had opened higher, following gains in Europe and Asia. Traders were relieved that international lenders agreed early Monday to release emergency rescue funds for Cyprus. The European Central Bank will continue to support the nation's foundering banks. In exchange, Cyprus will take major steps to shrink its troubled banking industry and cut its budget.
At first, the deal to save Cyprus' banks erased the latest source of anxiety for investors, who have traded for more than three years under the cloud of a debt crisis in Europe. The fear is that a heavily indebted country will default on its financial obligations and be forced to exit the shared currency. That could cause the region to unravel, deepening the recession there and roiling international financial markets.