The European Central Bank (ECB) has pledged to buy eurozone bonds as part of an effort to stem the eurozone government debt crisis. Specifically, it will be looking to buy the debt of the Italian and Spanish governments in an attempt to contain a possible run on those instruments. Italy and Spain are the two largest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain), those countries that are facing a crisis because of their potential (or real, in the case of Greece and Portugal) difficulties in paying off their government debt. Their economies are so much larger than those of Greece, and European resources may not be enough to bail out their economies. Italy's debt is over 100% of its GDP.
Spain's is only about 60%, but the drag on its economy caused by the bursting of its property bubble has also created a banking crisis in Spain that could put further strain on government resources. The market's response to the condition in both countries could be seen in an increase in their borrowing costs, as they were both forced to offer higher yields to get buyers for their most recent auction of government debt, the highest yields since 1997. In Spain's case, that may be a function of market panic given its lower debt levels. Given that Spain has the highest unemployment rate in the eurozone, an excess reliance on austerity could be counterproductive.
The unprecedented downgrade of U.S. government debt by Standard & Poor's from AAA to AA+ was also a factor. The idea that US treasuries could start to be considered at risk has rattled markets and will put further pressure on the fiscally less steady PIIGS countries. No doubt the ECB wanted to get word out of its support of eurozone government debt before the European markets opened on Monday morning. This was also the motivation for the G7 countries' pledge to take joint action if necessary.
The prospect of a U.S. double-dip recession, prompted in part by the austerity policies it seems to be committing to, has also put pressure on the eurozone, as a drop in U.S. consumption could take the eurozone into recession as well. This could prove to be a vicious circle; austerity measures slowing down the economy, which slows growth, which lowers tax receipts and increases government debt leading to yet another round of austerity; with recession in one country slowing down the economies of its trading partners.