Fear gripped Asian markets on Monday as the fallout from the historic downgrade of the U.S. debt rating drowned out pledges of assistance from Europe's central bank and soothing words from the Group of Seven.
Facing the unknown investors ran to gold, which hit a new record atop $1,712 an ounce, while share markets were again colored red.
The darkening mood was caught by economist Nouriel Roubini writing in the Financial Times.
The misguided decision by Standard & Poor's to downgrade the U.S. at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits, he warned.
So can we avoid another severe recession? It might simply be mission impossible.
The rout was all the more alarming as it came despite an assurance from G7 finance ministers that they were ready to take action to ensure stability and liquidity in markets.
And investors in Asia paid only brief heed to a surprise statement from the European Central Bank (ECB) that it would actively implement its controversial bond-buying program to fight the euro zone's debt crisis.
Yet prices for Italian and Spanish government bonds did rally once European trading got under way.
Investors also turned their attention to what the Federal Reserve might say at its policy meeting on Tuesday, fuelling speculation it might soon have to consider a third round of quantitative easing to resuscitate the world's richest economy.
It does seem that policymakers globally are swinging into action, said Shane Oliver, head of investment strategy at AMP Capital Investors, one of Australia's biggest fund managers.
He said the prospect of the ECB buying Italian and Spanish government bonds was particularly welcome.
A move to now start buying Italian bonds could be very positive in helping to calm fears about a further escalation of European debt problems, said Oliver. Speculators will now have to think twice about selling or shorting Italian and Spanish bonds knowing the ECB will be acting against them.
It was enough to send the euro up a cent in Asian trading on Monday to stand at $1.4360, although traders have been disappointed so often by EU leaders that they were reluctant to take it any further.
COUNTING ON ECB, FED
After a rare Sunday night conference call, 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.
A monetary source said this meant it is ready to start buying up the debt of these two countries.
The Euro system will intervene very significantly on markets and respond in a significant and cohesive way, the source said.
The central bank has been reluctant to step up its buying of distressed debt, fearing it would be seen as a blank check to spendthrift governments.
Since the program began in May last year it has bought just 80 billion euros of bonds, while Italy and Spain alone issue around 600 billion a year. Dealers said it would take a pledge to buy several hundred billion euros of debt to get ahead of contagion fears.
At the same time the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said it would take joint action if needed in foreign exchange markets because disorderly movements ... have adverse effects for economic and financial stability.
The Japanese intervened to restrain their currency last week while the Swiss National Bank surprised with a new round of easing as it fought a rapidly rising franc.
Pressure is now growing on the Fed to try further easing -- dubbed QE3 by the market -- though few expect anything dramatic as early as Tuesday's policy meeting.
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 with QE3.
CHINA NOT HAPPY
None of which was enough to reassure Washington's single biggest creditor, China.
It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibilities and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy, said a commentary in the People's Daily newspaper, the mouthpiece of China's ruling Communist party.
China holds well over a trillion dollars worth of U.S. government paper and was thus not pleased when Standard & Poor's cut the U.S. debt rating to AA-plus from AAA -- a move that also angered Treasury Secretary Timothy Geithner.
In an interview on NBC and CNBC television, Geithner said the rating agency has shown really terrible judgment and claimed its downgrade meant nothing and wouldn't affect investors' faith in U.S. debt.
Japanese Finance Minister Yoshihiko Noda put a brave face on it on Monday, saying that market trust in the dollar and U.S. Treasuries has not wavered and indicated Tokyo's readiness to maintain its massive holdings of U.S. government bonds.
(Additional reporting by Laura McInnis, David Lawder and Mark Felsenthal in Washington, Sarah Marsh in Berlin, Astrid Wendlandt in Paris, Kim Yeonhee and Yoo Choonsik in Seoul, Praveen Menon and Shaheen Pasha in Dubai, and Reuters bureaux worldwide; Writing by Wayne Cole; Editing by Ed Davies and Dean Yates)