7 Aug 2011

United States stripped of top credit rating

5:29 am on 7 August 2011

In a dramatic reversal of fortune for the world's largest economy, a major international credit-rating agency has stripped the United States of its AAA rating.

Citing concerns about growing US budget deficits, Standard & Poor's cut the long-term credit rating for the US by one notch to AA+.

US treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

Moreover, the agency says the outlook for the new rating is negative - a sign that another downgrade is possible in the next 12 to 18 months.

The move follows the long political battle in Washington in recent months over raising the US debt ceiling. The agency says the deficit reduction plan passed by Congress does not go far enough.

There has been no indication at this stage of a similar downgrade by the other two leading international credit-rating agencies, Moody's and Fitch.

Former US Comptroller-General David Walker told CNN he doesn't expect it to happen.

Trillions wiped off share value in a week

The S&P announcement was made after Wall Street closed on Friday, at the end of a week of turmoil on global stock markets reminiscent of the 2008 financial crisis.

A rollercoaster day of trading on Wall Street ended with shares slightly up, but the market still finished the week with steep losses.

The main stocks in Europe and Asia closed lower, as did New Zealand's sharemarket with a 3% fall on Friday - its biggest one-day loss since 2009.

About $US2.5 trillion has been wiped off the value of global equities this week.

Fear of return to recession

The turmoil has been driven by fears that the global economy is slipping back into recession and by the inability of policymakers in Europe to extinguish the debt crisis engulfing the region.

Italy, under pressure to help halt the rout, has now pledged to speed up austerity measures and social reforms in return for European Central Bank (ECB) help with funding.

The ECB's reluctance to buy Italian bonds and ease pressure on markets has frustrated investors. Sources with knowledge of the matter say the bank is willing to take that step only if Italy carries out reforms.

At a specially convened news conference after European markets closed, Italian Prime Minister Silvio Berlusconi said his government would speed up measures to balance its budget by 2013, a year earlier than planned, and work to make balanced budgets a constitutional requirement.

'Potential' for second global crisis

A New Zealand market analyst, Westpac currency strategist Imre Speizer, says a second global financial crisis is not yet unfolding.

But he says the potential is there unless the authorities take action, such as the US Federal Reserve announcing extra stimulus.