Global leaders arranged a round of emergency calls to discuss the twin debt crises in Europe and the US that are causing turmoil in financial markets.

After a week that saw $2.5 trillion wiped off global stock markets, they are under pressure to show political leadership and reassure markets that Western governments have both the will and ability to reduce their huge and growing public debt loads.

French President Nicolas Sarkozy, who chairs the G7/G20 group of leading economies, conferred with Britain's Prime Minister David Cameron ahead of a call planned for this weekend by G7 finance ministers and central bankers.

'They discussed the euro area and the US debt downgrade. Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days,' a spokesman for Cameron said.
   
Standard and Poor's deepened the urgency for action late on Friday by stripping the US of its top-tier AAA credit rating, a move that over time could ripple through markets worldwide by pushing up borrowing costs and making it more difficult to secure a lasting recovery.

It cited the acrimonious debate in Washington on raising the debt ceiling and near political paralysis over the best way to reduce the its $14.3 trillion debt, which on the current trajectory could climb above 100 percent of US national output this decade.

President Barack Obama called on lawmakers once again on Saturday to set aside partisan politics and work together and to put the nation's fiscal house in order and stimulate the stagnant economy.

But the most immediate concern for financial markets was the debt crisis in the euro zone, where yields on Italian and Spanish debt have soared to 14-year highs on political wrangling and doubts over the vigor of budget cuts.   

The European Central Bank was scheduled to hold a rare Sunday conference call. Markets are anxiously looking for the central bank to start buying Italian and Spanish debt on Monday to stabilise prices, a move that has split the ECB governing council.

Investors saw the ECB's failure to include Italy and Spain in a relaunch of its bond purchases late last week as a sign of the depth of political divisions over the role of the euro zone currency. German officials want to see stiffer austerity programs in place before the ECB would shoulder more Italian and Spanish debt.

The danger is that further pressure on Italian and Spanish bonds could undermine an already damaged European banking system and lock Italy, the world's eighth largest economy, out of the  market. 

Italy's Prime Minister Silvio Berlusconi, his government weakened by infighting, ruled out early elections to stem market panic. 'This has never been an option,' Berlusconi said.
 Instead he has pledged to bring forward austerity measures and balance the budget by 2013, a year ahead of schedule -- steps the ECB will consider to gauge whether to buy its bonds.   

S&P's one-notch downgrade of the US sovereign credit rating to AA-plus, while not totally unexpected, adds another level of uncertainty. Loss of gold-plated status for the world's benchmark interest rate risks pushing up borrowing costs on everything from car loans, mortgages and corporate debt to government bonds worldwide.

'However justified, S&P couldn't have picked a worse time to downgrade the US,' said Rabobank in a note to clients.   

A senior European diplomatic source said the US downgrade, coupled with Europe's problems, raised the need for international policy coordination. G7 finance ministers and central bankers of the major industrialised nations were to hold talks by telephone on either Saturday or Sunday, the source said.

China, the largest foreign holder of US debt, took the world's economic superpower to task for allowing its fiscal house to get into such disarray. It also revived its calls for a new stable global reserve currency to replace the US dollar, gaining a sympathetic ear in the United Kingdom.

'The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,' China's official Xinhua news agency said in a commentary.

Xinhua scorned the US for a 'debt addiction' and 'short sighted' political wrangling. China, it said, 'has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets.'    

India's Finance Minister Pranab Mukherjee told reporters: 'There is no need to unnecessarily press the panic button.'  - Reuters