Sun, Aug 07, 2011 - Page 1 News List

G7 meeting mulled on US downgrade, eurozone crisis

Reuters, NEW YORK and ROME

In a sign of how concerned world leaders are about a slide in stocks that wiped about US$2.5 trillion off global markets this week, Italian Prime Minister Silvio Berlusconi said finance ministers from the G7 nations would meet in “just a few days” to seek a common plan of action.

No other member of the group — which does not include the world’s second-largest economy China — has confirmed the meeting.

Worries the eurozone debt crisis was spreading and the US was slipping into recession drove a week-long rout in financial markets. Better-than-expected jobs growth last month helped support Wall Street on Friday, but stocks slipped back into the red in late trading.

The US lost its top-tier “AAA” credit rating from Standard & Poor’s (S&P) on Friday, hours after investors alarmed by the eurozone debt crisis forced Italy to speed up an austerity drive.

China, the largest foreign holder of US government debt, made clear that Washington had only itself to blame and called for a new stable global reserve currency.

The S&P cut in the US long-term credit rating by a notch to “AA-plus” was an unprecedented blow and resulted from concerns about the nation’s budget deficits and climbing debt burden. The move is likely to eventually raise borrowing costs for the US government, companies and consumers.

Philippine Finance Secretary Cesar Purisima backed the call for alternative global reserve currencies and urged Washington to deal with its fundamental economic problems.

“[Unless it does] I think we may have entered an era of less predictable and less stable global financial markets as a result of the credit downgrade of the global reserve currency and the benchmark financial instrument. This resulting unease may in the short-term make investors more tentative and slow down the global economy,” Purisima said.

In Europe, Italy buckled to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank (ECB) help with funding.

After a frantic round of telephone diplomacy, Berlusconi said his government would bring forward cuts to balance the Italian budget in 2013, a year ahead of schedule, and rush through welfare and labor market reforms.

Investors have been unimpressed by a 48 billion euro (US$68.46 billion) austerity package passed by Berlusconi’s government, partly because most of the measures were delayed until after elections scheduled for 2013, for clear political reasons.

Discord among EU policymakers over how to stop a disastrous spread of the sovereign debt crisis to Italy and Spain, the eurozone’s third and fourth-largest economies, has frustrated investors. The ECB disappointed markets by buying Irish and Portuguese bonds, but not government paper in Italy and Spain, where bond yields have blown out this week on fears they may need bailing out.

That now appears to have been a gambit to force Italy to act.

This story has been viewed 20264 times.
TOP top