World leaders race to head off fresh market turmoil

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World leaders and finance chiefs raced Sunday to head off spiralling tension triggered by eurozone debt contagion and a US rating downgrade as the clock ticked on the opening of the markets Monday.

Officials from the Group of 20 and Group of 7 economies held emergency conference calls Sunday as leaders of major powers conferred by phone and European Central Bank (ECB) governors readied for talks before the opening of the New Zealand market, the first to trade in Asia.

No details emerged from the talks, with officials in European doggedly tight-lipped.

In a sign of a possible storm ahead, the Israeli market fell seven percent Sunday and Gulf markets tumbled on opening but later trimmed some losses as investors reacted to Standard & Poor's unprecedented cut in the the US rating to AA+ from the top notch triple-A.

"Until the stock markets open (Monday) the extent of earthquake caused by the downgrade of the US. debt rating will not be known," said Spain's El Pais daily newspaper. "But everything points to a black Monday which may intensify the attacks on the euro."

News of the historic US ratings downgrade hit Friday after the close of markets, battered last week by their worst falls since 2008.

Fears of a global meltdown, which some analysts see as potentially worse than the 2008 collapse, sent vacationing leaders scrambling in a flurry of phone calls from London to Paris to Washington to stem the tide.

Officials from G7 nations -- Britain, Canada, France, Germany, Italy, Japan and the United States -- confirmed the need for ministerial talks on market stability, said Japan's Kyodo News agency said, quoting unnamed sources.

The G20 teleconference involved deputy finance ministers, South Korean Deputy Finance Minister Choi Jong-Ku told Dow Jones Newswires without elaborating.

In Rome, Dow Jones said ECB governors would hold a video conference at around 1600 GMT. An ECB spokeswoman refused to comment.

Officials have been specially tight-lipped on ECB moves as markets watch to see whether it will step in and buy back some of the bonds piled up by Italy, the latest potential victim of the euro crisis which also threatens Spain.

The ECB "does not like buying bonds as it does not want to fund governments -- but things are different in a liquidity crisis where there is a risk of systemic events," said Goldman Sachs economist Dirck Schumacher.

Italy, the eurozone's third largest economy, last week saw its borrowing costs hit record highs due to a loss of confidence over its debt mountain -- equal to 120 percent of its GDP -- as well as poor growth prospects and political tensions.

Trying to head off the pressure, Italian Prime Minister Silvio Berlusconi pledged lawmakers would return early to rush through even more austerity measures, including a constitutional amendment to force governments to keep balanced budgets.

EU economic affairs commissioner Olli Rehn praised the move, saying: "It is important that Italy tries to restore confidence to the markets."

Spain too announced new reforms to bring in an additional 4.9 billion euros ($7.0 billion) and help rein in the public deficit.

But Finance Minister Elena Salgado hit out again at the ECB, demanding it "do its job in supporting stability in the debt markets."

Some analysts have blamed ECB chief Jean-Claude Trichet's failure to clearly back Spanish and Italian government bonds last week for contributing to the massive turmoil on the stock and debt markets.

ECB intervention would reassure sceptical markets, unconvinced that "politicians have a strategy for dealing with Italy and Spain," said Will Hedden, a trader at IG Index.

After the S&P move topped out a week in which markets lost untold billions, holidaying leaders of Britain and France, Prime Minister David Cameron and President Nicolas Sarkozy, discussed the crisis at length by phone.

"Both agreed the importance of working together," a Downing Street spokesman said.

The latest twists come only two weeks after a special eurozone summit reached an agreement meant to tame the spreading crisis, which EU commission head Jose Manual Barroso said has now moved beyond the euro periphery.

Rushing back to Brussels, the EU's Rehn offered to propose new, common "Euro-bonds" next month, hoping to backstop the weaker eurozone countries and so ease the pressure when they have to raise fresh funds to cover their debt.

Until now taboo, such bonds would allow eurozone governments to raise funds needed to run their countries based on guarantees from the entire 17-country bloc of 332 million people.

The EU's executive Commission, the ECB and the European Financial Stability Facility (EFSF) are "working night and day to put flesh on the bones" of an agreement struck at the July 21 summit, Rehn said.

The summit agreed to flesh out a crisis rescue pot -- the 440-billion-euro ($625 billion) EFSF -- so it could step in to help troubled banks and buy back government bonds on markets, a first step to building something akin to a European version of the International Monetary Fund.

"Such a comprehensive, detailed and technically complex agreement requires time to implement," Rehn said Friday.

"It would have been fantastic if the agreement had been fully operational on 22 July," Rehn said. "But this was of course impossible".

If national parliaments ratify the changes as swiftly as hoped, the euro's new financial firepower should be in place in September.

But parliaments in some northern nations, where taxpayers are loathe to pay bills for the likes of Greece, may balk at moves to ramp up its size or scope.

"The European reaction has been neither quick or concerted and confirms the institutional weaknesses behind the common currency," El Pais said.

"It is hoped that EU leaders now show greater diligence and determination ... the problem is that with each passing day, the room for manoeuvre is being reduced."

© 2011 AFP

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