European policy makers try to stave off crisis

NEW YORK (CNNMoney) -- European finance officials are stepping up their efforts to slow the rising panic over the euro zone's debt crisis.

The European Central Bank signaled in a statement on Sunday that it was ready to begin buying Italian and Spanish government bonds.

Both countries -- two of the largest economies in Europe -- have been under pressure to speed up budget reforms as investors have demanded higher interest rates for loans.

The move represents an escalation in the official response to Europe's debt crisis, which is now more than a year old and until recently was contained to smaller economies like Greece, Ireland and Portugal.

In a separate announcement Sunday, finance ministers from the G-7 -- a group of significant world economies -- pledged support for troubled countries.

"In the face of renewed strains on financial markets, we ... affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence," the G-7 statement read.

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Investors lending money to Italy and Spain have been demanding higher interest rates, now north of 5.5%, while Greek bonds carry a 15% rate. (More on what's wrong with Italy)

Coupled with weak growth, the sharp increase in interest rates only adds to the countries' debt and makes it even more difficult for them to dig out of their holes.

The high government debt loads threaten to trap countries in a vicious cycle: The debt weighs on economic growth -- and austerity measures aimed at attacking the debt only put a further drag on their economies.

In recent days, European leaders have been scrambling to figure out solutions.

Details of the ECB plans to buy Italian and Spanish bonds were not immediately clear.

But analysts at Barclays Capital Research said the move, coming in addition to efforts the countries are making to get their budgets in better shape, should help calm markets.

"It carries the clear hint that the ECB is ready to purchase debt on its own book if needed, should it consider markets dysfunctional and so interfering with monetary policy transmission," Barclays analysts wrote in a note Sunday.

Europe has been criticized as slow to respond to its debt crisis.

Last month, leaders agreed to a new 109 billion euro aid package for Greece and proposed an expansion of the European Financial Stability Fund -- a controversial bailout program established last year.

The stability fund's powers, which has so far disbursed money to Ireland and Portugal, will be greatly expanded under the new plan.

The 440 billion euro fund will have the authority to buy sovereign debt in the secondary market, meaning it could absorb discounted government bonds from banks and investors.

It will also be able to provide lines of credit to shore up banks in troubled euro zone nations, even ones that do not have currently get help from the program, such as Italy and Spain.

But the stability fund's expansion has yet to be completed.

In its statement on Sunday, the ECB said that "governments stand ready" to activate the fund "once [it] is operational."