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August 15, 2022

Markets brace for mayhem as US credit downgraded for first time

Obama’s administration fiercely contests the move, claiming that Standard&Poor’s decision was based on wrong calculations. G7, G20 leaders, ECB hold emergency meetings to find ways of containing spreading turmoil on financial markets. PM Boc: Romania has to abstain from any populist policies. Romanian stock market – steepest drop in the region.

World stock markets are braced for another bloodbath when they open in Asia and across Europe today following the controversial decision by Standard & Poor’s to downgrade the triple A credit rating of the United States.

Over the week, the FTSE 100 index lost 10 per cent with more than GBP 148 bln wiped off the value of leading shares, the third biggest amount in its 30-year history. In Japan, the Nikkei was down 5.4 per cent, in the US the S&P index was 7.2 per cent lower, and on Friday US treasuries showed their single biggest daily rise to 2.75 per cent since December, while gold reached a new peak of USD 1,683, up 10 per cent on the month, ‘The Independent’ reported. Ross Norman of the gold dealer Sharps Pixley said: “What’s happening is simple: investors are de-risking and putting their money into safe havens like gold – which will keep climbing. Investors don’t believe that the politicians or the economists know how to handle this crisis, so they are forcing them into taking decisions.”

Shares in European banks were also hit badly over fears that Europe is heading for a second stage of the banking crisis because of huge exposures to the eurozone’s sovereign debt and whether this will be repaid if the crisis spreads.

The decision by S&P – which is fiercely contested by President Barack Obama’s administration amid claims that it is using the wrong calculations – could lead to higher borrowing costs for the US government, government and consumers, putting further pressure on the US economy’s ability to grow. S&P cut the long-term US credit rating for the first time since it started in 1941, by one notch from AAA to AA-plus, because of concerns about the US budget deficit and the rising debt burden.

David Beers, the head of sovereign ratings at S&P, said over the weekend that the agency’s decision was influenced by a change in Washington’s “political dynamics” that hampered Congress from reaching a more comprehensive plan to cut the deficit. It was suggested there could be a further downgrade later this year.

In July, S&P had placed the United States’ rating on “CreditWatch with negative implications” as the debt ceiling debate devolved into partisan bickering, CNN said. To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a “credible” plan to tackle the nation’s long-term debt. In its report Friday, S&P ruled that the U.S. fell short: “The downgrade reflects our opinion that the … plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.” But a senior Obama administration official called Standard & Poor’s move “a facts-be-damned decision,” saying the rating agency admitted to an error that inflated US deficits by USD 2 trillion. U.S. Treasury officials received S&P’s analysis Friday afternoon and alerted the agency to the error, said the administration official, who was not authorised to speak for attribution.

The agency acknowledged the mistake, but said it was sticking with its decision to lower the US rating, CNN also said. Other sources familiar with the S&P matter called the move political and said the decision was rushed out too quickly. The other two major credit rating agencies, Moody’s and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

Prior to the downgrade, President Obama welcomed a report showing that the number of unemployed people in the US was down in July, but conceded that “we’ve got to do better.” “We are going to get through this. Things will get better and we’re going to get there together,” he said, according to the BBC.

Obama, who spoke Friday afternoon with France’s President Nicolas Sarkozy and German Chancellor Angela Merkel about the crisis, noted that July marked the 17th consecutive month of private-sector job growth in the U.S., but said much more work needs to be done.

China and Russia react furiously

The S&P downgrade not only reflects the weakness of the US’s global economic standing, but could have implications for the dollar reserve currency status. The Chinese authorities, which own USD 2 trillion of US debt, and the Russians, with billions of dollars invested, both reacted furiously to the news, warning the administration that it must put its economy in order fast.

In China, a commentary published by the official Xinhua news agency was critical of the US government and questioned whether the US dollar should continue to be the global reserve currency. “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” the commentary said, according to CNN.

Finance Minister Francois Baroin, in an interview Saturday for French television network i-tele, said France had “full confidence” in the strength of the US economy. “The figures that were published yesterday on the (US) unemployment showed a positive shift, better than expected, so it’s going in the right direction,” he said.

Berkshire Hathaway Chairman and CEO Warren Buffett told the FOX Business Network that S&P’s downgrade “doesn’t make sense.”

Emergency talks to calm global markets turmoil

Meanwhile, the European Central Bank was due to hold emergency talks yesterday on whether to start buying Italian debt to contain spreading turmoil on financial markets, BBC News reported. Finance ministers from the G7 major economic powers were also set to hold emergency talks on how to calm the markets before they reopen on Monday. Italy is the latest and biggest economy to be hit by the eurozone crisis. The price Italy pays on its government bonds has shot up amid growing doubts it can keep its debt level so high while economic growth is so slow. Spain, too, has been caught up in the crisis – hammered by high unemployment, high government debt and anaemic growth. The high levels of debt coupled with low growth and an uncertain response among eurozone leaders to the crisis has sparked fears that both countries could become engulfed in the same cycle which has led to Greece, the Irish Republic and Portugal already being bailed out.

Last week, European Commission President Jose Manuel Barroso said authorities in the eurozone were failing to prevent the sovereign debt crisis from spreading.

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