Global leaders race to stem panic over US credit rating downgrade

Finance ministers from G7 countries hold urgent talks to try to prevent loss of confidence in world’s biggest economy World leaders are battling to prevent panic from spreading across financial markets as the sudden downgrading of the US credit rating triggered fears of global turmoil when stock exchanges open. Finance ministers from the G7 leading industrial countries – many of them away on summer holiday – agreed to a series of urgent weekend telephone talks to try to prevent a loss of confidence in the world’s biggest economy. But the uncertainty grew when the Saudi market dropped a massive 5.5%. French finance minister Francois Baroin, whose country holds the G7 presidency, said he been in contact with colleagues for 24 hours. “We’ll be carefully watching the evolution of what might happen on Monday,” he said. Chancellor George Osborne, holidaying in California, held talks with his G7 counterparts and David Cameron, who is in Tuscany. Officials said Osborne would be ready to interrupt his holiday if a full G7 meeting was called. Treasury sources said the chancellor had been using the discussions to address the interconnected problems of the debt crisis in the eurozone as events unfolded in Washington. Osborne was reported to be urging richer eurozone states such as Germany and France to back the radical step of issuing so-called “eurobonds”, meaning they would underwrite the debt of poorer eurozone nations in return for gaining a formal say in the future running of their economies. The European Central Bank will hold a conference call of its governing council to discuss its response to the eurozone’s debt crisis, an ECB source said. Italy’s pledge to speed up austerity measures and whether the ECB should buy Italian government bonds are expected to be discussed. S&P’s downgrading of the US credit rating on Friday added to fears over debt levels and economic growth in the world’s biggest economy and in large European nations, like Italy and Spain. As the effect was felt across the globe, China, the largest foreign holder of US debt, issued an extraordinary demand that Washington change its economic ways and address its “debt addiction”. It said the rating reduction would be followed by more “devastating credit rating cuts” and global financial turbulence if the US failed to learn to “live within its means”. “China, the largest creditor of the world’s sole superpower, has every right to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” it said. It also insisted the US should slash its “gigantic military expenditure and bloated social welfare costs”, and repeated its demand for a new global reserve currency to replace the dollar. In London, opinion was split between those who believed the markets would take the US credit decision in their stride and others who believed it could trigger a series of events that would do untold damage to the global financial system. Paul Dales, senior US economist at thinktank Capital Economics, said the loss of the AAA rating “shouldn’t be a complete disaster” and that any adverse reaction should prove temporary. However, he added: “The downgrade comes at a time when the financial markets and advanced economies are very fragile. The extra uncertainty could easily prolong the latest slide in equity prices. In the worse-case scenario, this could prove to be the trigger for another financial crisis that sends the US and other western economies back into recession.” Erik Britton, director of Fathom Financial Consulting, a City-based consultancy, said there was a fear that the US downgrade “will trigger a chain reaction across global bond markets that could culminate in an Italian or Spanish sovereign default and a systemic banking crisis”. He said that US government debt had been viewed as “risk free” by the markets, but that had now changed, meaning that the yields on US bonds would rise and their price would fall. Because other bonds would be similarly affected, massive problems would result for banks worldwide which would be left holding bonds of declining value. “A small further rise in the Italian government bond yield, which could be triggered by the US downgrade, would make a default there inevitable. And that would present a systemic threat to the global financial system that would make Lehmans look like a walk in the park,” said Britton. The Treasury said the US credit rating decision was a “complete vindication” for the government’s robust approach to cutting the deficit: “When this government came to power, Britain’s AAA rating was on negative outlook from S&P, but thanks to the decisions we’ve taken to deal with out debts and support a sustainable recovery our rating has been reaffirmed, helping to keep borrowing rates down for taxpayers, homeowners and businesses,” said a spokesman. But the shadow chancellor, Ed Balls, said the plan to reduce the deficit was not working because there was no growth in the economy. “The problem in Britain is that George Osborne’s plan is not working. By trying to go too far and too fast, confidence has been knocked and last year’s recovery has been choked off,” he said. Global economy United States US economy Europe Economics Euro Financial sector Market turmoil Stock markets Saudi Arabia France George Osborne David Cameron European Central Bank Economic policy Toby Helm Nils Pratley Tania Branigan guardian.co.uk

Posted by on August 6, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.