Global policy actions fail to halt stocks rout (Reuters)

WASHINGTON/LONDON (Reuters) ? Political leaders failed to halt a global stock market rout that gathered steam on Monday as investors lost confidence that Europe and the United States can rein in their budgets quickly and fear spread of a double-dip recession.

The European Central Bank swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third and fourth largest economies. But bickering persisted in Europe over a longer-term rescue plan.

In the United States, President Barack Obama called for urgent action on the U.S. budget deficit but his proposal on taxes was promptly rebuffed by Republicans.

The G7 finance ministers and central bankers' pledge on Sunday to help smooth markets if needed provided little solace.

Selling that began in Asia and Europe accelerated in the United States, where the broad Standard and Poor's 500 index plunged 6.7 percent to close at 1,119.46, its worst sell-off since December 1, 2008. The Dow Jones shed 582 points to 10,809.85.

A huge blow to investor confidence was the Standard and Poor's downgrade of the U.S. sovereign credit rating late Friday, which compounded spreading concerns that the worsening euro-zone debt crisis and a faltering U.S. economy heighten the risks of a double-dip recession.

"People are asking, can the economy still grow in face of all this?" said John Carey, portfolio manager at Pioneer Investment Management in Boston, with $260 billion under management.

Realization on both sides of the Atlantic that the political obstacles to quick budgetary reform are so huge and the monetary options so limited, meaning little help is on the way, has deepened the pessimism.

The worsening market turmoil puts significant pressure on the U.S. Federal Reserve at its regular policy meeting on Tuesday to announce some fresh measures of support for a damaged U.S. economy.

"If the Fed does nothing, it could prove to be a disappointment at this point," said JP Morgan analysts.

Stock losses have wiped more than $3.8 trillion from investor wealth globally in the last eight days and sent investors rushing for safety into the Swiss franc, the Japanese yen and gold.

The G7 group of finance ministers and central bankers from major industrialized nations said late on Sunday they stand ready to provide extra cash if markets seize up, are consulting regularly and could cooperate to smooth volatile FX markets if needed.

But there were no immediate signs of extreme stresses that would prompt central bank intervention.

ECB TO THE RESCUE

On the political front, Obama said he hoped the Standard and Poor's downgrade of the United States' prized AAA credit rating would add urgency to the budget cutting plans.

He called for both tax hikes and cuts to welfare programs as part of the $1.5 trillion in deficit reduction that a special committee in Congress would deliver in late November. But Republican House Speaker John Boehner once again rejected the call, saying tax hikes were "simply the wrong approach."

In Europe, traders estimated the ECB bought about 2 billion euros in Italian and Spanish debt after it agreed to broaden its controversial bond-buying program to include the bloc's third- and fourth-biggest economies.

The ECB welcomed announcements by Italy and Spain of new deficit-cutting measures and economic reforms as well as a Franco-German pledge that the euro zone's rescue fund will take responsibility for bond buying once it is operational, probably in October.

"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program," ECB President Jean-Claude Trichet said in a statement.

The central bank action aimed to change the dynamics on bond markets that had been pushing Italian and Spanish borrowing costs up toward unsustainable levels since mid-July.

Since the program began in May last year it has bought just 76 billion euros of bonds, while Italy and Spain alone issue around 600 billion a year.

"The intervention by the European Central Bank this morning seems to have been working," Irish Finance Minister Michael Noonan told RTE public radio.

"Last week the risk was that as bond rates in Italy went toward 7.0 percent, they'd be driven into some kind of bailout program. They have fallen by almost one percent this morning so they are well out of the bailout territory now."

Spreads of Italian and Spanish bonds over German debt narrowed sharply and the cost of insuring peripheral European debt against default fell. But French sovereign credit default swaps hit a record high of 160 basis points as the U.S. rating downgrade raised questions about how long other AAA countries, such as France, could hold onto their top-notch ratings.

The ECB move was seen as only a temporary solution however, due to the sheer size of Italy's bond market -- $1.6 trillion.

Longer term, more profound measures need to be taken or some of the euro zone risks breaking up, some analysts said.

"They can keep it up for some weeks but I don't think it can have a lasting impact on the market," said Glenn Marci, interest rate strategist at DZ Bank.

FED AHEAD

European stocks sank to their lowest in nearly two years as doubts emerged about governments' ability to deal with the euro zone debt crisis and its impact on economic growth.

Berlin denied that Germany and France had made any stronger promises about the euro zone rescue fund's commitment to buy bonds of weak member states in the secondary market, after the ECB singled out that pledge.

A bailout of Italy would overwhelm the EFSF's existing resources. Germany has so far opposed expanding it but French Finance Minister Francois Baroin said: "The allotment is 440 billion and we've already said if we need to go further we will go further."

Over the weekend the Group of Seven major industrial nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said they would take joint action if needed in foreign exchange markets because "disorderly movements ... have adverse effects for economic and financial stability."

A G20 communique along similar lines followed shortly after European markets opened.

The Japanese intervened to restrain their surging currency last week while the Swiss National Bank surprised with a new round of easing as it fought a rapidly rising franc.

Investors are now turning their attention to what the Federal Reserve might say at its policy meeting on Tuesday.

Although the Fed's meeting is not expected to produce any immediate change in policy, pressure is now growing on the Fed to try further monetary easing -- dubbed QE3 by the market.

The U.S. central bank completed a second installment of bond buying, or quantitative easing, worth $600 billion on June 30 and the Fed is reinvesting its portfolio as it matures.

"We are probably a little bit closer. But I don't think we're there yet," said Nomura's chief global economist Paul Sheard. "I think the Fed would have to get a little bit more concerned that financial markets were spinning out of control before accepting ... QE3."

(Additional reporting by Laura MacInnis, David Lawder and Mark Felsenthal in Washington, Sarah Marsh and Noah Barkin in Berlin, and Gerard Bon and Paul Taylor in Paris; Editing by Clive McKeef and Christopher Wilson)

Source: http://us.rd.yahoo.com/dailynews/rss/business/*http%3A//news.yahoo.com/s/nm/20110808/bs_nm/us_crisis

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