Global policymakers held an emergency conference call yesterday to discuss the twin debt crises in the EU and the US that are causing market turmoil and stoking fears that developed economies could slide back into recession.
After a week that saw US$2.5 trillion wiped off global stock markets, political leaders are under mounting pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.
South Korea said finance deputies from the G20 major economies discussed the European debt crisis and US sovereign rating downgrade yesterday morning in Asian time zones.
A Japanese government source said finance leaders from the G7 developed economies would also discuss the crisis and could issue a statement afterwards, although the timing of such a call was unclear.
The European Central Bank (ECB) was scheduled to hold a rare conference call yesterday afternoon. Investors are anxiously looking for the central bank to start buying Italian and Spanish debt today to -stabilize prices, a proposal that has split the ECB’s governing council.
French President Nicolas Sarkozy, who chairs the G7/G20 group of leading economies, conferred with Britain’s Prime Minister David Cameron on Saturday.
In Washington, a White House economic advisor castigated ratings agency Standard and Poor’s (S&P) for downgrading the US’ credit rating from “AAA” to “AA-plus,” a move that could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.
Washington’s Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in US Treasuries remained unshaken.
There was no confirmation of the timing of a G7 call for finance ministers and central bankers, but a second Japanese government source said it “would be normal” for it to take place before Asian markets opened. Tokyo’s stock market, the biggest in Asia, starts trading at 9am today.
The most immediate concern for financial markets was the debt crisis in the eurozone, where yields on Italian and Spanish debt have soared to 14-year highs on -political wrangling and doubts over the vigor of budget cuts.
Investors saw the ECB’s failure to include Italy and Spain in a -relaunch of its bond purchases late last week as a sign of the depth of political divisions over the role of the eurozone currency.
S&P’s one-notch downgrade of the US sovereign credit, while not totally unexpected, adds another level of uncertainty.
“However justified, S&P couldn’t have picked a worse time to downgrade the US,” Rabobank said in a note to clients.
China, the largest foreign holder of US debt, took the world’s economic superpower to task for allowing its fiscal house to get into such disarray.
Yesterday, a commentary in the People’s Daily said Asian exporters, who depend on demand from the US, could be among the biggest victims of the mounting US -economic woes.
“The lowering of the United States’ long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the US dollar,” said economist Sun Lijian (孫立堅), writing in the paper.