World rallies to tame debt crisis, avoid market sell-off

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The G20 vowed Monday to bolster financial stability and the European Central Bank pledged to "actively" buy eurozone bonds to stem a debt crisis gone global as battered markets showed some signs of recovery.

Finance ministers and central bank governors from the Group of 20 industrialised and emerging economies said they would "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."

Its statement came after Asian stock markets posted substantial losses but as the European trading day got off to a better start, with solid gains in Italy and Spain, two of the eurozone members most under pressure.

The G20 said it would maintain close contact in coming weeks "and cooperate as appropriate, ready to take action 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.

Major European markets opened with losses but sentiment picked up on the various statements and most importantly as the ECB bought eurozone government bonds, taking the pressure off Italy and Spain in spectacular fashion.

The G7 and G20 statements came after a flurry of weekend conference calls and contacts between political leaders and officials who feared a debacle on the markets Monday if nothing was done.

The statements were part of a global response made necessary by Standard & Poor's taking the historic step of cutting the US rating to AA+ from the top notch triple-A on Friday, sparking fears that the eh .

Late Sunday, the European Central Bank said it would "actively implement" a programme that buys eurozone bonds, a measure which seemed to be working Monday with a sharp easing in pressure on Italian and Spanish government debt.

That was also after Italy and Spain announced measures to curb their debt and deficits and France and Germany pushed for full and rapid implementation of measures agreed at an emergency eurozone summit last month to protect the euro.

Asian stock markets nonetheless suffered substantial losses as they responded to the US ratings downgrade.

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.

Mumbai fell 3.08 percent in early trade but then bounced back to show a loss of around 0.90 percent.

"Global markets will have to come to terms with a partial downgrade of the world's risk-free asset and a shock and awe intervention by the ECB," RBS analysts wrote.

In Europe, stock markets showed signs of resilience, with London off 0.13 percent after opening with a fall of 1.15 percent, Paris down 0.21 percent and Frankfurt off 0.74 percent at around 0840 GMT.

Markets in Madrid and Milan bounced higher as it appeared the ECB was using its financial firepower on Spain and Italy's behalf, with the former up by 3.31 percent and the latter gaining 4.08 percent.

As Europe tackles its problems, global markets will also want to know how Washington plans to reduce its more than $14 trillion debt without smothering a sluggish economic recovery, since its limited debt deal came after a bruising partisan battle in Congress.

International Monetary Fund chief Christine Lagarde welcomed the widespread pledges to stabilise financial markets.

"This cooperation will contribute to maintaining confidence and spurring global economic growth," she said.

Germany and France, the two biggest eurozone economies, pressed for action on agreed emergency measures to protect the single currency, in a joint statement issued by President Nicolas Sarkozy and Chancellor Angela Merkel.

"They stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries," the statement said.

The ECB is the only European Union institution capable of acting fast and mustering significant firepower to keep markets from testing Italy and Spain, but its moves could fuel inflation and damage its independence and credibility.

Barclays Capital economists warned that "it could be difficult for the Eurosystem (of central banks) to engage in purchases of significant enough size in order to arrest the upwards shift in spreads and yields."

Goldman Sachs economists estimated the ECB would have to purchase at least 100-130 billion euros ($143-186 billion) worth of Italian and Spanish bonds, compared with the total amount it has purchased so far of 74 billion euros.

Italy, the eurozone's third largest economy, saw its borrowing costs hit record highs last week amid falling confidence over its massive debt -- equal to 120 percent of total annual output -- poor growth prospects and political tensions.

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

Spain said it would raise an additional 4.9 billion euros ($7.0 billion) and help curb its public deficit.

It was believed those moves came in exchange for the ECB agreeing to step in with bond purchases -- an ECB statement said it considered "decisive and swift implementation by both governments as essential."

© 2011 AFP

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