G7, ECB vow to fight debt as stock markets plummet

"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth," a statement issued by the Group of Seven industrialised economies said as Asian markets fell again on fears over the state of the global economy.

"We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe," it said.

"The US has adopted reforms that will deliver substantial deficit reduction over the medium term," said the statement, which was published after a flurry of telephone talks presided over by French Economy Minister Francois Baroin.

France currently heads the G7, which also groups Britain, Canada, Germany, Italy, Japan and the United States.

The statement came after Standard & Poor's took the historic step of cutting the US rating to AA+ from the top notch triple-A, a shock move that increased fears of a stock market debacle when exchanges opened again on Monday.

The European Central Bank said late Sunday that it would make major purchases of eurozone bonds, a measure which seemed to be working Monday with a sharp easing in the pressure on Italian and Spanish government debt.

This was after Italy and Spain announced new measures to boost their economies and France and Germany pushed for full and rapid implementation of terms agreed at an emergency eurozone summit last month.

Asian stock markets opened with substantial losses that could lead to a ripple effect across the Middle East, Europe and the United States -- although some showed some resilience in later trade.

Tokyo shed 2.18 per cent, Sydney fell 2.91 per cent, Seoul sank 3.82 per cent and Shanghai lost 3.55 per cent.

Hong Kong was 3.88 per cent lower while Mumbai fell 3.08 per cent in early trade and Moscow's RTS index was down 3.30 per cent at the open.

"Global markets will have to come to terms with a partial downgrade of the world's risk-free asset and a shock and awe intervention by the ECB to stabilise the (eurozone) periphery," which also includes Greece, Ireland and Portugal, RBS analysts wrote.

Eurozone debt markets will focus on any purchases of bonds issued by Italy and Spain, the third- and fourth-biggest eurozone economies, for signs of ECB activity.

The ECB itself never identifies which bonds it buys but France said Monday that it was taking Italian and Spanish bonds.

Global markets will also want to know how Washington plans to reduce its more than $14 trillion debt without smothering a sluggish economic recovery, since its limited debt deal came after a bruising partisan battle in Congress.

International Monetary Fund chief Christine Lagarde welcomed the widespread pledges to stabilise financial markets.

"This cooperation will contribute to maintaining confidence and spurring global economic growth," she said.

Germany and France, the two biggest eurozone economies, pressed for action on agreed emergency measures to protect the single currency, in a joint statement issued by President Nicolas Sarkozy and Chancellor Angela Merkel.

"They stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries," the statement said.

The ECB is the only European Union institution capable of acting fast and mustering significant firepower to keep markets from testing Italy and Spain, but its moves could fuel inflation and damage its independence and credibility.

Barclays Capital economists warned that "it could be difficult for the Eurosystem (of central banks) to engage in purchases of significant enough size in order to arrest the upwards shift in spreads and yields."

Goldman Sachs economists estimated the ECB would have to purchase at least 100-130 billion euros ($143-186 billion) worth of Italian and Spanish bonds, compared with the total amount it has purchased so far of 74 billion euros.

Italy, the eurozone's third largest economy, saw its borrowing costs hit record highs last week amid falling confidence over its massive debt -- equal to 120 per cent of total annual output -- poor growth prospects and political tensions.

Italian Prime Minister Silvio Berlusconi vowed lawmakers would push through additional austerity measures including a constitutional amendment to force governments to keep balanced budgets.

Spain announced new reforms to bring in an additional 4.9 billion euros ($7.0 billion) and help curb its public deficit.

It was believed those moves came in exchange for the ECB agreeing to step in with bond purchases -- an ECB statement said it considered "decisive and swift implementation by both governments as essential."