8.08.2011

ECB dan#039;to actdan#039; over eurozone debt crisis


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 54459917 012601232 1 ECB dan#039;to actdan#039; over eurozone debt crisis World leaders fear more turmoil when markets reopen on Monday

The European Central Bank has said it will buy eurozone bond, following emergency talks on the debt crisis.

The bank did not say which bonds it would buy but analysts expect them to be from Italy and Spain, which have high debt burdens.

Global stock markets plunged last week because of the twin debt crises in the eurozone and the US.

In a sign of continuing uncertainty, the Tel Aviv stock market fell by more than 6% on Sunday.

There have been fears that unless leaders can announce a decisive plan of action, shares could plunge even further when Asian and European markets open on Monday.

BBC Business Editor Robert Peston says the ECB was split on whether to buy Italian and Spanish debt.

In a statement following an emergency telephone conference, the ECB welcomed the "decisive and swift" action taken by the governments in Rome and Madrid to boost competitiveness and cut their budget deficit.

Earlier, the leaders of France and Germany also hailed the action taken by Italy and Spain – the third- and fourth-biggest eurozone economies.

"In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries," said the statement from French President Nicolas Sarkozy and German Chancellor Angela Merkel.

The two leaders also reiterated their commitment to introducing measures to protect the euro which were agreed at a summit in July.

DowngradeEurope's Lehman moment?

Monday will be the first day major markets are open following the decision by credit rating agency Standard & Poor's to downgrade America's top-notch AAA credit rating to AA+.

S&P managing director John Chambers was quoted as saying on Sunday that there was a one in three chance of a further downgrade within two years.

Italy is the biggest economy to be hit by the eurozone crisis.

The price Italy pays on its government bonds has shot up amid growing doubts it can keep its debt level so high while economic growth is so low.

Spain, too, has been caught up in the crisis – hit by high unemployment, high government debt and slow growth.

There have been fears among investors that both countries could become engulfed in the same cycle that has led to Greece, the Irish Republic and Portugal already being bailed out.

Last week, European Commission President Jose Manuel Barroso said authorities in the eurozone were failing to prevent the sovereign debt crisis from spreading.

Both Italy and Spain insist they can service their debt.

On Friday, Italian Prime Minister Silvio Berlusconi said he was bringing forward austerity measures and would balance the government budget by 2013, one year ahead of schedule.

Last week the ECB bought Irish and Portuguese bonds but not Spanish and Italian debt.

Some analysts argue that investors expected the bank to buy Italian and Spanish debt soon after the eurozone leaders summit on 21 July, and the fact that it has not has undermined confidence in the markets.

Talks between finance ministers from the G7 group of developed countries were reported to be happening on Sunday, focusing on crafting a global response to the twin debt crises.

S&P, one of the world's three major rating agencies, failed to be impressed by a last-minute deal in the US last week to raise the US debt limit by up to $2.4tn (1.5tn) from $14.3tn.

It staved off a potential US government default on its debt but was only achieved after months of wrangling between Democrats and Republicans in Congress.

The credit rating downgrade is seen as a major embarrassment for President Obama's administration. It could also raise the cost of US government borrowing.

source: bbcuk

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bbc.biz 08 Aug, 2011


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