World races to beat back new week of market drama

BRUSSELS, Aug 7, 2011 (AFP) - World leaders and finance chiefs Sunday raced to check spiralling tension over the eurozone debt crisis and US credit rating downgrade as the clock ticked on the opening of the markets Monday.

Top officials from the Group of 20 major economies held an emergency conference call Sunday as leaders of the world's top powers conferred by phone and governors of the European Central Bank (ECB) prepared for talks before the opening of New Zealand market, the first to trade in Asia.

In a sign of the possible trouble to come, the Israeli market fell some six percent Sunday and other Middle East markets were lower, although they managed to trim some of their losses as investors reacted to Standard & Poor's unprecedented cut in the the US rating to AA+ from the top notch triple-A.

AFP - A picture taken on August 4, 2011 in Paris, shows a screen displaying stock value indicators at the entrance of the Bloomberg media company, which specialized in financial and economic news

The news of the historic US ratings cut Friday came 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 that the 2008 collapse sent vacationing leaders scrambling in a flurry of phone calls from London to Paris to Washington to stem the tide.

Finance ministers and central banks from the G7 nations -- Britain, Canada, France, Germany, Italy, Japan and the United States -- are to hold a telephone conference call and possibly issue a joint statement on Sunday, Jiji Press said in Tokyo.

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

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

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

Trying to head off the pressure, Italian Prime Minister Silvio Berlusconi this weekend said lawmakers would be called back early to rush through even more austerity measures, including a constitutional amendment to force governments to keep balanced budgets.

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, monitoring the situation closely and keeping in contact over the coming days," a Downing Street spokesman said.

The latest twists come only two weeks after a special 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.

Europe's economic affairs commissioner Olli Rehn said input from G7 and G20 partners will be of "critical importance" in efforts to resolve the chaos.

Rehn, rushing back to Brussels, announced that he will 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.

But markets, though thin in the European summer, appear to see all such moves by euro leaders as too little too late and many of the comments by officials, especially those from Barroso, appeared only to stoke the flames last week.

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

The summit agreed on the second bailout for Greece in just over a year, this time with a one-off participation by the private sector, and also fleshed out a euro crisis response, agreeing to beef up the size of a rescue pot -- the 440-billion-euro ($625 billion) EFSF -- as well as its powers.

The new measures would enable the EFSF to step in to help troubled banks and buy back government bonds on the 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".

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