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

FRANKFURT—The G20 vowed to bolster stability and the European Central Bank went shopping for eurozone bonds Monday to stem a debt crisis gone global but economists raised doubts and battered markets were knocked back down.

Finance ministers and central bankers from the Group of 20 industrialized 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 posted substantial losses while European trade saw promising gains disappear by midday, with Friday’s unprecedented US ratings downgrade adding to the toxic mix.

A sharply worded editorial in the Chinese People’s Daily – the mouthpiece of China’s Communist Party – said Western nations threatened global prosperity by “ignoring their responsibility” to the rest of the world.

The G20 stressed that members 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) industrialized countries – Britain, Canada, France, Germany, Italy, Japan and the United States – made a similar commitment.

Sentiment on major European financial markets picked up briefly as a result and crucially as the ECB bought eurozone government bonds, taking the pressure off Italy and Spain but the feel-good factor faded fast.

Economists warned that even the long-awaited ECB intervention was no “silver bullet” and that big obstacles remained to stabilizing strained public finances and putting adequate eurozone defense mechanisms in place quickly.

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

The moves were part of a global response made additionally necessary by Standard & Poor’s taking the historic step of cutting its US credit rating to AA+ from the topnotch triple-A 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 economic recovery since a modest US debt deal left Congress bruised and bitter.

Late Sunday, the ECB said it would “actively implement” a program that buys eurozone bonds, a measure that seemed to be working Monday, at least initially, as pressure eased 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 suffered heavy losses as they responded to the prospect of a serious global economic slump, highlighted by the US 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.

In Europe, stock markets initially showed signs of resilience but were all solidly in the red in midday trading.

London was down 1.57 percent, Paris lost 1.94 percent and Frankfurt off 2.50 percent at around 1030 GMT.

Markets in Madrid and Milan bounced sharply higher on the ECB lead but then slipped, giving back all their gains.

Analysts said a likely lack of unanimity among ECB governers could limit its intervention and UniCredit strategist Luca Cazzulani stressed that “a credible mix of fiscal and growth-enhancing measures is of the essence to restore market confidence.”

Deutsche Bank economist Gilles Moec said “the market will focus evermore” on 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.

“Given this, the extent to which the ECB is willing to intervene remains unclear,” Citi analyst Giada Giani said, echoing the concern of many.

The ECB is the only European institution capable of acting fast and keeping markets from ravaging Italy and Spain but Barclays Capital economists warned that it might be hard to buy enough government debt to keep the pressure off Italy and Spain.

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 purchased so far of 74 billion euros.

Italy, the eurozone’s third-largest economy, saw its borrowing costs hit record highs last week on concern 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.

It was believed that came in exchange for the ECB agreeing to step in with bond purchases – an ECB statement said “decisive and swift implementation” of the Italian announcement was “essential.”