European Central Bank confers on Italy crisis, world markets following U.S. credit downgrade

FRANKFURT, Germany — The European Central Bank says it will “actively implement” a bond-purchase program that could boost Spanish and Italian bonds and drive down interest yields that threaten those countries with financial disaster.

Sunday’s statement from bank President Jean-Claude Trichet

comes as global finance officials discussed ways to ward off more turmoil ahead of the opening of financial markets today, the first substantial trading after the U.S. lost its triple-A bond rating from Standard & Poor’s on Friday.

Officials from the Group of 20 rich and developing countries also held talks aimed at minimizing market shocks. G-7 officials were reportedly to confer before markets open in Asia as well.

The G-7 includes Britain, Canada, France, Germany, Italy, the U.S. and Japan, while the G-20 includes those countries and large emerging economies Brazil, Russia, India and China.

The burst of activity on a Sunday in August underscored how government debt levels in Europe and the U.S. have unsettled financial markets — and sharpened fears that debt troubles could derail the global recovery from the 2007-2009 financial crisis.

The statement from the ECB, issued after a conference call among its officials, did not say which countries’ bonds it would buy or the amounts.

But the beneficiaries are expected to be Italy and Spain, market analysts say. Italy and Spain are trying to avoid the spiraling interest rates that forced Greece, Ireland and Portugal to seek bailout loans. Purchases could drive up bond prices, which move in the opposite directions from interest yields.

Last week, yields for both countries were above 6 percent, moving toward the levels that upended the three smaller countries. Italy in particular is regarded as too large for Europe’s (euro) 440 billion bailout fund to rescue, raising the possibility of a financial disaster that could devastate the eurozone economy.

Analysts at Royal Bank of Scotland said recent moves by Italy to strengthen its finances helped bring the ECB to its decision. The bank was reluctant to come to the rescue unless governments first close the holes in their finances.

The bank statement Sunday said it was “essential” for them to follow through on their commitments.

Italian Premier Silvio Berlusconi said last week that Italy would balance its budget in 2013, a year earlier than previously expected, and speed up other budget measures.

“The ECB will start a large scale bond buying of Italian and Spanish sovereign bonds on Monday morning in our view as euro area governments have signed up to additional fiscal measures where needed,” the analysts from RBs said.

They said the purchases could run (euro) 2.5 billion ($3.5 billion) a day and reach (euro) 600 billion if continued for a year — but “will stop the collapse of the bond market in countries under stress.”

Eurozone officials agreed at a summit July 21 to give their bailout fund the ability to buy government bonds. But national parliaments are on summer break and have not approved the change yet, leaving the ECB as the last resort as market turmoil increased.

Italy has debt equivalent to 120 percent of annual economic output, the second highest in the eurozone behind Greece, and weak prospects for economic growth that would help pay it down.

Last week already saw markets around the world deep in the red amid fears the global economy may be weakening and the uncertainty created by Europe’s sovereign debt crisis.

In a sign of early fallout, Middle East markets tumbled Sunday on their first day of business after the downgrade. Egypt’s benchmark EGX30 index fell more than 4 percent, and other Gulf markets also were sharply lower. Israel’s benchmark TA-25 index plunged 7 percent to close at 1,074 points.

U.S. markets and others reopen Monday but have had rough patches recently. The Dow Jones industrial average dropped 512 points Thursday, its worst performance since the financial crisis of 2008, and regained only a fraction of that drop Friday.

Many economists see the world’s big central banks as the last line of defense at this moment in the crisis, after policymakers in Europe and the U.S. have failed to agree on the kind of shock-and-awe moves that many investors demand.

Investors have also been calling on the U.S. Federal Reserve to start pumping money into the American economy again to help underpin the slowing economic recovery.

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Mari Yamaguchi reported from Tokyo. Kelly Olsen in Seoul, South Korea; Adam Schreck in Dubai; and Christopher Bodeen in Beijing contributed to this report.