Debt crisis resists assault by ECB and global leaders

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World leaders scrambled Monday to ensure financial and economic stability as the European Central Bank bought eurozone bonds to stem a spiralling debt crisis, but chronic doubts endured and battered markets tumbled again.

Finance ministers and central bankers from the Group of 20 industrialised and emerging economies pledged to "take all necessary initiatives in a coordinated way to support financial stability and to foster stronger economic growth in a spirit of cooperation and confidence."

Their statement came after Asian stock markets suffered heavy losses and European trade saw promising gains melt by noon, with Friday's unprecedented US ratings downgrade adding to the toxic cocktail.

A sharply-worded editorial in the Chinese People's Daily -- the mouthpiece of China's Communist Party -- said Western nations threatened global well-being by "ignoring their responsibility" to the rest of the world.

The G20 stressed that its members would maintain constant contact "to ensure financial stability and liquidity in financial markets."

Earlier, the Group of Seven (G7) industrialised countries -- Britain, Canada, France, Germany, Italy, Japan and the United States -- made a similar commitment.

Sentiment on major European financial markets took a stab at resisting the downward trend before throwing in the towel and heading firmly south as well.

Economists warned that even the long-awaited ECB intervention on bond markets was no "silver bullet" and that big obstacles remained to stabilising strained public finances and putting credible eurozone defence mechanisms in place.

The G7 and G20 statements came after a whirlwind of weekend conference calls between political leaders and officials who saw storm clouds hovering over the markets.

The moves were part of a global response dictated by Standard & Poor's taking the historic step of cutting its US credit rating to AA+ from the top notch triple-A late on Friday.

As Europe struggles with its problems, global markets also want to know how Washington will reduce its more than $14 trillion debt without choking off an economic recovery since a modest US debt deal.

Late Sunday, the ECB said it would "actively implement" a programme that buys eurozone bonds, a measure which seemed to be working Monday, at least initially, as pressure eased on Italian and Spanish government debt.

That was also helped by Italy and Spain announcing measures to curb deficits and debt, and France and Germany pushing for full and rapid implementation of measures agreed at an emergency eurozone summit last month to protect the euro.

"However, we think it would be optimistic to assume that this response will be sustained or that the bond purchases will do much to address the eurozones fiscal crisis," Capital Economics chief economist Jonathan Loynes said.

Asian stock markets were the first to give a group reaction to the US downgrade and prospect of a serious global economic slump.

Tokyo shed 2.18 percent, Hong Kong lost 2.11 percent, Sydney fell 2.91 percent, Seoul sank 3.82 percent and Shanghai lost 3.55 percent.

In Europe, stock markets initially showed signs of resilience but were all bleeding red in late trading.

London was down 1.77 percent, Paris lost 2.92 percent and Frankfurt off 2.85 percent at around 1400 GMT.

Markets in Madrid and Milan initially bounced higher as news of the ECB's intervention got around but then stalled and gave back all their gains.

Gold shot to record highs above $1,700 an ounce and the euro fell to around 1.4185 dollars.

Analysts said dissension among ECB governors on the bond purchases could curb the intervention and Commerzbank analyst Bernd Weidensteiner added: "In principle, the crisis can probably only be tackled by reducing deficit and stabilising debt levels. But this needs time."

IHS Global Insight chief economist Howard Archer said the ECB was building an essential firewall for Madrid and Rome but could not be content with "half-hearted measures in exercising its function as true lender of last resort - the markets need to be absolutely convinced."

Deutsche Bank economist Gilles Moec said the focus would now shift to the lending capacity of the European Financial Stability Facility (EFSF), the eurozone's rescue fund that is too small to bail out Italy or Spain if they go the way of Greece, Ireland and Portugal.

But a German government spokesman said there were no plans to boost the 440-billion-euro ($625-billion) EFSF, which is supposed to take over bond buying from the ECB as soon as possible.

The ECB is the only European institution capable of acting fast and keeping at bay so-called bond vigilantes who strike fear into finance officials.

But Barclays Capital economists warned that it might be hard to buy enough government debt to keep the pressure off for long.

Goldman Sachs economists estimated the ECB would have to purchase at least 100-130 billion euros worth of Italian and Spanish bonds, compared with the total amount it had held until now of 74 billion euros.

Italy, the eurozone's third largest economy, saw its borrowing costs hit record highs last week.

Italian Prime Minister Silvio Berlusconi vowed that lawmakers would push through additional austerity measures including a constitutional amendment to force governments to keep balanced budgets.

He was slammed Monday by the opposition, which claimed Italy was now under "external administration," the same term used for bankrupt companies.

© 2011 AFP

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