Financial markets look set for another bout of turbulence, with Italy under fire and the United States' debt downgraded, after $2.5 trillion was wiped off the value of world shares last week.
Following are analysts views on what U.S., European and G20 policymakers could do to stem the tide.
MOHAMED EL-ERIAN, PIMCO
Some of the immediate impact will be forestalled by the fact that no other country is able and willing to replace the U.S. at the core of the global system. Other than a general increase in risk premia and volatility, it is therefore hard to predict with a high degree of conviction how the global system will react. Specifically, will it simply come to a new normality, with an AA+ at its core, or are further structural changes now inevitable?
All of that said, there is a sliver of a silver lining - and an important one. America's downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country's eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.
It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialize and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.
MIKE LENHOFF, BREWIN DOLPHIN IN LONDON
The managers of the euro zone have to display a sense of determination to progress the things they have already done.
The ECB has got to confront the speculators who are out to test the policymakers. There is no reason why the ECB cannot simply go ahead and imply that the are going to support the Italians and the Spanish.
It is better that they don't say anything but go in and show there is another side to the market.
As for Washington: They displayed a complete lack of leadership. Now America has got what they deserved.
It might cause some upheaval temporarily. The big issue is the euro zone and its implications for the banking system.
PHILIPPE WAECHTER, NATIXIS ASSET MANAGEMENT IN PARIS
Tensions have been rising in the banking system due to worries about the fragility and risks associated with the portfolios held by banks.
Tomorrow morning, we will be facing a new uncertainty linked to the downgrading of U.S. debt. It can create strong tensions.
I expect central banks to communicate in a coordinated fashion, say they will work with G7 countries, deliver measures to increase liquidity and intervene so that risks are perceived as being more limited.
GUSTAV HORN, DIRECTOR OF THE MACROECONOMIC POLICY INSTITUTE
AT THE HANS-BOECKLER FOUNDATION IN DUSSELDORF
If policymakers in co-operation with central bankers do not succeed in deciding upon measures that could restore confidence this weekend, a global recession is becoming more and more likely.
In order to avoid this, major central banks must achieve a commitment to buy public bonds on secondary markets. Policy makers should on the one hand give a credible commitment to assist countries in crisis.
On the other, they should also commit to a medium term strategy to reduce public debt also by higher taxes what is the only way to achieve this goal fast enough. Otherwise economic policy would be permanently hostage of financial markets developments.
SWEDER VAN WIJNBERGEN, PROFESSOR OF ECONOMICS UNIVERSITY OF
AMSTERDAM AND EX-SECRETARY GENERAL AT DUTCH FINANCE MINISTRY
This is way beyond the potential of the ECB. The underlying problem is that the U.S. can't come to grips with their fiscal deficit. This is the cause of the financial trouble and is where you need to look for remedies.
The S&P downgrade is a warning signal, that the U.S. has too much political paralysis to bring its fiscal deficit under control. This isn't about economics, the economics of the deficit is straightforward. This is about politics. It isn't a monetary problem, it is a big fiscal problem and it is up to the politicians to decide which measures to take to fix it.
The lack of political leadership exists in Europe as much as it does in the U.S.
The ECB buying up Italian or Spanish bonds won't do much. It gives very temporary relief, we've seen that in Greece. It will smooth things over for some days, but again this is also not a monetary issue. The ECB can try to block a panic but there are underlying issues that need to be addressed and at some stage politicians need to take responsibility.
It would be very unwise for the ECB to step in because it makes politicians believe that they can postpone taking hard measures. And that is the wrong message.
GEOFFREY YU, UBS IN LONDON
For the first time in 70 years, an asset once defined as risk-free is no longer. The biggest fear is forced liquidation of government/agency paper by funds. That could deepen already escalating stress on the banking system. Investors will need to closely watch Libor, basis swap, commercial paper and other key funding markets on Monday.
The Fed and Treasury, however, now have plenty of experience dealing with such events, so expect them to take emergency measures to alleviate any sign of stress. There is little reason to doubt they have contingency plans in place.
The downgrade is widely seen as pushing yields higher in the short term, albeit marginally, and the general perception will be that the US economy will be hurt if borrowing costs rise. However, the long-term effect will depend on various factors. Data, like Friday's payrolls report, remains far too volatile to discern for signs of whether more sinister forces are afoot for underlying economic fundamentals. And with Fed Chairman Bernanke clearly not ruling out further QE as an option, nothing is off the table. A rapid escalation in yields would meet a response.
DAVID BACH, ECONOMIST AT IE BUSINESS SCHOOL IN MADRID
What would help is if euro zone finance ministers came out and say they will triple the size of the EFSF. That would be a very bold statement. Or if they were to say they will have serious discussions over fiscal coordination.
My concern is that we could end up seeing a Japanese scenario of a lost decade in the U.S. and the euro zone. If you look at Japan it took small and indecisive measures to end the crisis and what was needed was bold economic reforms.
Another option that would calm markets is a decision to introduce euro bonds. Finance ministers could say that it's going to take six months, but at least they are working on it, and they could put strict guidelines in place on borrowing. I think a lot of governments in the periphery would be willing to accept that, and even let the bigger states like Germany write the rules.
STEVEN ENGLANDER, CITI IN NEW YORK
The biggest upside for the euro would come if the ECB bought Spanish and Italian bonds and that might be enough to generate a global response among risk-correlated currencies, if it was done in sufficient size to convince the investors that contagion was overdone.
If (the Swiss and Japanese) do not intervene again on strength, investors may see them as giving up on intervention because of the magnitude and nature of the forces at play. The odds are that the week will start with FX investors challenging the SNB and MoF to intervene in size.
A Fed response is likely to emerge only if there is turmoil in markets. On the margin if the downgrade contributes to conditions that support QE3 or other easing measures, the USD is likely to weaken once the measures are announced.
In the first instance the Fed will probably hope that the market reaction is minimal and that they are not called on to take a position. In my encounters with foreign officials, I find that the response to QE2 (and even more so to QE3 in anticipation) is overwhelmingly negative. If QE3 were implemented it would likely be far more negative for the USD than any direct reaction to the downgrade is likely to be.
FILIPE GARCIA, HEAD OF INFORMACAO DE MERCADOS FINANCEIROS
CONSULTANTS IN PORTO
At the European level, only the swift implementation of the decisions of the July 21 summit and taking the path of economic-financial federalism can diminish the pressures on the euro zone. I think an ECB intervention in the debt markets will not be efficient, as, by the way, it never has been in the past.
G20 can try to help showing financial solidarity. Since it has not been possible to work to mitigate global imbalances, G20 could give to understand that it will mutually ensure responsibilities taken on sovereign debt.
It's historic times we live in. The problem has ceased being confined to the European periphery. Now we talk about two countries out of G7 (US and Italy) and soon they may start talking about France.
HOWARD WHEELDON, BGC PARTNERS, LONDON
I think (what is needed is) admission that the single currency now is facing its biggest ever test and it has been found significantly wanting.
Integrity is what is needed. Integrity of the politicians instead of trying to skirt around the problem without any solution and admit that the central issue is that the euro, in its present form, can not survive.
If you accept the inevitable, then you can try and formulate a solution of how you're going to address all the problems. It may take a year or more, but you can't do anything until you accept that the system you're currently running is no longer able to cope with the strains being placed on it.
NICK STADTMILLER, DUBAI-BASED EMIRATES NBD
So far, the steps that Europe has taken have been reactive and now they have to start taking proactive initiatives ahead of market moves.
Italy has taken quite a few steps to improve its fiscal house. You need to see strong preemptive moves in terms of European institutions to stand behind Italy.
Interest rate cuts are rather challenging. In the UK, there is little room to move down. The problem is not one of liquidity but of credit worthiness on the part of the sovereigns.
You need to have stronger statements from the policy makers. Details must be provided. If you look at the grand bargain they came to in July, it was short on detail and that type of uncertainty frustrates people.
(Reporting by Jamie McGeever, Jeremy Gaunt, Lorraine Turner, Andrei Khalip, Nigel Davies, Astrid Wendlandt and Roberta Cowan)