The decision and reactions to Standard & Poor's announcement that it was downgrading the United States credit rating from AAA to AA-plus is continuing proof of the mess that the global economy is in, with bets being taken on the prospects of a double-dip recession in the US and implosion of the euro and even of the European Union.
Financial leaders of the Group of Seven (G7) industrial countries and the European Central Bank huddled in Sunday conference calls and then rushed out separate statements to try to offer reassurances before Asian markets opened yesterday.
Bloomberg quoted one leading foreign exchange trader as saying that the ECB 'has decided to bring out the bazooka'.
Unfortunately, when trillions of dollars flood the financial markets each day, bazookas are hardly more powerful than a child's peashooter.
G7 ministers declared: 'We affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close co-operation and confidence.' Words, mountains of words, not particularly inspired words, nor ones you could take to the bank. How does an 'affirm' stack up against 'promise' or 'pledge' or 'determined'?
Markets in Tokyo, Hong Kong, Singapore, all fell by 2 per cent to 4 per cent, oil fell, the dollar fell, and gold rose. All this came after stock market losses wiped US$2.5 trillion off the value of global shares last week.
S&P took away the prized AAA rating of the United States, citing the debacle between the White House and Congress over raising the US debt ceiling. The ratings agency said it was 'pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilises the government's debt dynamics anytime soon'. To add insult to injury, S&P said it was also placing the US on negative watch, meaning that further downgrades may follow.