The World from Berlin: 'The Biggest Pressure to Act Falls on the Europeans'

Europe had feared a "Black Monday" on the stock markets following Standard & Poor's decision to downgrade the US'sácredit rating. But the markets defied doomsday predictions following statements by the ECB, the G-7 and German and French leadersáMerkel and Sarkozy. On the editorial pages, German papers dissect an emerging trans-Atlantic crisis.

Information screens at the Australian stock exchange Zoom
DPA

Information screens at the Australian stock exchange

Traders had feared a "Black Monday" on the stock markets, but by mid-morning the panic hadn't materialized among investors in Europe. Statements made by the G-7 group of industrialized nations, German Chancellor Angela Merkel, French President Nicolas Sarkozy and the European Central Bank (ECB) were apparently well-received.

Responding to the growing debt crisis in Europe and the decision by ratings agency Standard & Poor's to downgrade the US's credit rating, the world's seven leading industrial nations issued a joint statement Monday aimed at stabilizing financial markets around the world. The countries agreed to provide liquidity and stability to markets and to ensure economic growth if needed, finance ministers from the G-7 said after a conference call on Monday.

The countries said they would not rule out the possibility of intervention on the markets to stop uncontrolled fluctuations in currency exchange rates, which could harm economic and financial stability. The finance ministers said these steps, as well as national austerity measures, would help lead to sustainable national budgets. The G-7 also welcomed additional savings measures undertaken by Italy and Spain, which have shown signs in recent days that they could become the next victims of Europe's sovereign debt crisis and a threat to the survival of the euro common currency.

Analysts said they believed the statement would help calm the markets. However, additional uncertainty remains after Standard and Poor's Friday decision to downgrade US debt from the best mark of AAA to AA+. The agency based its decision on doubts over Washington's ability to get a handle on its massive national deficit.

'A Line in the Sand on Contagion'

"The G-7 has effectively drawn a line in the sand on contagion," Christian Cooper, head of US dollar derivatives trading at Jefferies & Co. told the Associated Press.

On Sunday, the ECB signalled it would begin buying government bonds. In a statement released after a telephone crisis meeting on Sunday, the bank said it would "actively implement" its bond-purchase program -- a move that has been opposed by Germany's central bank, the Bundesbank. The statement did not indicate the countries from which bonds would be purchased, but analysts believe they will include Italy and Spain.

Analysts at the Royal Bank of Scotland (RBS) welcomed the move, which they said may have been motivated by statements in Italy and Spain that the countries would approve additional austerity measures. RBS argued the bond-purchasing program would buy "a significant amount of time" for the afflicted countries. "This policy response is in our view necessary and welcome even if it does not address the underlying weaknesses of the system: high private and or public debt, a lack of fiscal integration, the absence of a euro-area banking regulator with binding powers," RBS stated.

The purchase of their bonds could also provide Rome and Madrid with greater breathing room until the permanent euro rescue fund is established in 2014. The ECB welcomed statements by Italian Prime Minister Silvio Berlusconi that parliament in his country would return early from its summer break to pass additional savings measures as well as a balanced budget amendment to the constitution. Meanwhile, Madrid announced new reforms that would bring in an addition €4.9 billion ($7 billion) and reduce its public deficit. The ECB statement said it considered "decisive and swift implementation by both governments as essential." ECB President Jean-Claude Trichet said the bank "considers essential the prompt implementation of all the decisions taken at the euro area summit" in July, and "welcomes the joint commitment expressed by Germany and France today."

In a statement issued on Sunday night, German Chancellor Angela Merkel and French President Nicholas Sarkozy reiterated their commitment to fully implement the decisions made at the summit. Among these is a plan to buy back €20 billion in older debt on the secondary markets through the EFSF.

France and Germany are confident that the "ECB analysis will provide the appropriate basis for secondary market interventions as it will help determine the case when financial stability of the euro zone as a whole is at risk." The leaders said it was important that parliamentary approval in both countries "be obtained swiftly by the end of September."

Last week, stock markets in Europe suffered heavy losses as a result of concerns over a double-dip recession in the United States and the European debt crisis.

European Markets Rise

Although most major Asian markets were down on Monday, markets in Europe appeared to have brushed off the weekend move by the ECB, with some key indices showing slight increases despite the downgrading of the US credit rating, which many feared would have global economic consequences. Frankfurt's DAX was up by 0.4 percent, London's FTSE 100 up by 0.6 percent, Paris' CAC-40 Index up by 1.5 percent. The Stoxx Europe 600 was up by 0.6 percent. Meanwhile, in Spain, the IBEX-35 was up by 2.6 percent and Italy's FTSE-MIB up by 3 percent.

But in Asia on Monday the announcements by the G-7 and the ECB had little quieting effect on the markets. Hong Kong's Hang Seng index fell by 4 percent, Seoul's Kospi index by 3.3 percent. By midday, Tokyo's Nikkei index had lost 1.3 percent of its value. Meanwhile, Australia's main index fell by 1.8 percent, the Singapore stock exchange was down -3.7 percent, Taiwan's market was down 2.6 percent and China's Shanghai Composite by 3 percent.

Friday's downgrade of the US's credit-worthiness brought further concerns to markets already jittery about a worsening European debt crisis that is now threatening two major economies -- those of Italy and Spain -- and a slowdown in the global economy.

David Cohen of Action Economics in Singapore said the downgrade didn't come as a surprise given the number of warnings that had been issued by Standard & Poor's in recent weeks. "As long as people can calm down quickly enough, it need not become another global financial crisis," Cohen said of nervous investors.

In Washington, US Treasury Secretary Timothy Geithner said S&P used "terrible judgement" when it downgraded the country's rating last week. He told broadcaster NBC the agency had shown a "stunning lack of knowledge about the mathematics used to draw up a federal budget, and I think they came to exactly the wrong conclusion."

In Germany, the downgrade and fears of market reactions dominate the editorial pages on Monday. A common thread is a fear that politicians are no longer capable of bringing deficit problems under control.

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