World stock markets are braced for another bloodbath when they open in Asia tonight and across Europe tomorrow 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 £148bn 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 $1,683, up 10 per cent on the month.
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."
The decision by S&P – which is fiercely contested by President 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.
The move 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 $2trn 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.
Investors and traders are now waiting to see if world leaders – most of whom are on holiday – will meet for an emergency G7 meeting this week to discuss ways of containing the crisis properly. One trader said the European Central Bank, under heavy criticism for not reacting fast enough to the growing crisis in Italy and Spain, is expected to intervene in the markets this week to buy Italian bonds.
Shares in European banks were hit badly last week over fears that we are 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.