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European Central Bank to buy bonds to combat market 'dysfunction'

The European Central Bank announced Sunday that it will jump into the markets to buy bonds of euro-zone governments, hoping to stave off panic selling on Monday by investors fearful of a meltdown.

The ECB issued a statement saying it would “actively implement” its bond-buying program to deal with "dysfunctional market segments.”

The move had been expected after investors continued to dump Italian and Spanish government bonds last week, driving market yields up and threatening a replay of what has happened to Greece, Ireland and Portugal over the last 15 months.

Italy10 The yield on 10-year Italian bonds (charted at left) rose as high as 6.19% last week, up from 4.88% at the end of June.

Rising bond yields could make it too expensive for Italy and Spain to borrow, thereby risking that they, too, would need bailouts from the European Union.

Because Italy’s bond market is the world’s third-largest after the U.S. and Japan, the prospect of investors continuing to flee that market has sent chills through the global financial system in recent weeks.

The markets’ worries were compounded late Friday after credit-rating firm Standard & Poor’s downgraded the U.S. government’s rating to AA+ to AAA -- the first time in history that America has lost its top-rung rating.

Investors’ mood also has been darkened by weeks of data showing that the global economic recovery is fading. Last week, reports showed that U.S. consumer spending fell in June from May -- the first decline since 2009 -- and that U.S. manufacturing activity slowed sharply in July.

Deepening fears about the economy and Europe’s debt crisis fueled massive selling in stocks worldwide last week. The Dow Jones industrial average plunged 5.8% for the week, its worst weekly decline since the depths of the recession in March 2009. The Dow ended Friday at 11,444.

With memories of the 2008 financial-system collapse still fresh, all of this has led to grave apprehension about what will happen to stock and bond markets Monday.

Asian markets are set to open at about 5 p.m. PDT on Sunday.

RELATED:

S&P downgrades U.S. credit rating

What the U.S. downgrade may mean for markets

Memories of the stock market crash leave investors on edge

Geithner says he will stay on as Treasury Secretary into 2012

-- Tom Petruno

 
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