The European Central Bank faced a decision on Sunday whether to buy Italian bonds to try to prevent the euro zone debt crisis from widening, while global policymakers conferred on the twin financial crises in Europe and the United States.
After a week that saw $2.5 trillion wiped off world stock markets, political leaders are under searing pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.
ECB President Jean-Claude Trichet wants the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, one ECB source said.
The source said that if the ECB council opted to intervene on Italy at a crucial conference call expected to have started at 1700 GMT (1200 EDT), the ECB and national central banks would start buying Italian bonds when markets open on Monday.
That would likely prompt a sizable relief rally on global markets. If it does not act, the reverse would be true. On Sunday afternoon, German Chancellor Angela Merkel and French President Nichola Sarkozy weighed in with a joint statement praising both Italy and Spain for their pledges to impose budget austerity.
But they stressed that "complete and speedy implementation of the announced measures is key to restor(ing) market confidence."
Another source said the council would look also at possible emergency liquidity measures to prevent money markets freezing. The fourth anniversary of the global credit crunch which ushered in the financial crisis looms this week.
The back-and-forth between Standard & Poor's and the Obama administration over whether the downgrade of Washington's AAA rating to AA+ was justified continued on US Sunday-morning talk shows where a senior official from the ratings agency said its concerns about political impasse in Washington were valid.
John Chambers, an S&P managing director, said on ABC's "This Week" that years may be needed to regain AAA status and even them "it would take, I think, more ability to reach consensus in Washington than what we're observing now."
White House economic adviser Gene Sperling blasted the S&P ruling on Saturday night, saying it "smacked of an institution starting with a conclusion and shaping any arguments to fit it."
The US Treasury said S&P's debt calculations were off by $2 trillion but the agency said that did not change the fact that the US's longer-term debt prospects were worsening.
Twin debt crises in the United States and Europe had policy makers scrambling to keep financial markets from panic.
The ECB reactivated its sovereign bond-buying program on Thursday but purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy. That did nothing to stem market attacks on Italian assets.
Berlusconi's plans entail moving up a balancing of the budget by one year to 2013, enshrining a balanced budget rule in the constitution and pushing through welfare and labour market reforms after talks with trade unions and employers. He gave little detail about how that would be achieved and the measures will take some time to enact.
Markets in the Gulf region and in Israel, among the first to trade since the US credit downgrading, tumbled on Sunday on worries the US ratings downgrade and European debt woes may trigger another global downturn.
G-20, G-7 CRISIS CONTACTS
South Korea said finance deputies from the Group of 20 big economies addressed the European crisis and US sovereign rating downgrade in an emergency conference call on Sunday morning Asian time.
A Japanese government source said finance leaders from the Group of Seven big developed economies would also discuss the crisis and might issue a statement afterward. The timing of a planned conference call, expected on Sunday, was unclear but was likely before Asian markets reopen on Monday.
French President Nicolas Sarkozy, who chairs the G7 and G20 forums this year, conferred with Britain's Prime Minister David Cameron on Saturday.
"Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days," a spokesman for Cameron said.
Over time, S&P's move could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.
S&P chief David Beers told "Fox News Sunday" that the Treasury Department's criticism of the credit rating agency's analysis was a "complete misrepresentation." Even with the debt limit agreement passed by the US Congress, he said, "the underlying debt burden of the US is rising and will continue to rise over the next decade."
Asked about prospects for a further lowering of the US rating, Beers said the agency's negative outlook meant that "risks are on the downside."
ALARM IN GERMAN, FRENCH MEDIA
Newspapers in Germany, the euro zone's reluctant bankroller, were both incredulous and gloomy on Sunday about the financial upheaval.
Welt am Sonntag dedicated an entire section to global economic uncertainties, entitled "Der Crash" and wrote: "No one could have foreseen this dramatic crash and now the situation can only be endured with gallows humour."
French newspapers carried grim headlines with Le Journal du Dimanche trumpeting "The world on the edge of collapse" with a sub-headline saying: "The week starting should be crucial. Markets from now on are living in fear of a crash."
Washington's Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in US Treasuries remained unshaken and urging investors not to panic.
"I expressed our country's position on the (G20 conference) call that there will be no sudden change in our reserve management policy," South Korean Deputy Finance Minister Choi Jong-ku told Reuters by telephone, referring to Seoul's heavy ownership of US bonds.
"There's no alternative that provides such stability and liquidity," added Choi.
The most immediate concern for financial markets was the debt crunch in the euro zone, where yields on Italian and Spanish debt have leaped to 14-year highs on political wrangling and doubts over the vigor of budget cuts. "The ECB has got to confront the speculators who are out to test the policymakers," said Mike Lenhoff, chief strategist at Brewin Dolphin in London. "(The US downgrade) might cause some upheaval temporarily. The big issue is the euro zone and its implications for the banking system."