Political leaders from across the eurozone were urged to take a decisive grip on Europe's sovereign debt crisis last night before the continent plunged back into recession.
Around £150bn was wiped from the value of Britain's top 100 companies, as markets panicked that no single leader or central bank appeared to be taking charge of the response to the turmoil.
The rollercoaster ride on global stock markets was exacerbated by rumours that the US could be about to lose its gold-plated AAA credit rating – a rumour that the White House appeared to confirm last night when it told correspondents that it was preparing for an imminent credit downgrade.
The likely loss of the AAA rating on US government debt, a staple of the modern financial system, comes in the wake of a $2.1 trillion deficit-reduction plan, forged at the last minute by the country's bitterly divided political parties. Standard & Poor's, the most powerful rating agency, had said it wanted $4 trillion in cuts and reassurance that paying the national debt would not be a political football. News organisations including CNBC and ABC reported White House sources, who claimed S&P would condemn Republicans for refusing to countenance tax rises to cut the national debt. S&P refused to comment on the rumours.
The downgrade drama unfolding in Washington last night came after a day when conflicting signals from political leaders and financial authorities in Europe caused huge swings on the markets. Politicians and businessmen lamented the failure of European leaders to act in concert. Romano Prodi, the former president of the European Commission and former Italian prime minister, said bluntly: "We don't know who is in charge." He warned of "a problem of power in Europe" and criticised "the weakness of EU institutions".
The former Europe minister Denis MacShane told The Independent that the escalating eurozone crisis "exposes a Europe whose institutions no longer work". The pro-European MP said that the EU's legitimacy was ebbing away and that drastic reform was needed.
The Foreign Secretary, William Hague – who is the most senior member of the Government left in Britain because David Cameron, George Osborne and Nick Clegg are on holiday – urged Spanish and Italian politicians quickly to set out their own plans for public-sector cuts. "It's very important that Spain and Italy demonstrate to the satisfaction of markets the credibility of their intentions to bring their deficits and debts under control," he said.
Downing Street said Mr Cameron had spoken to the German Chancellor, Angel Merkel, and the pair agreed to keep in close contact. Mr Osborne spoke over the phone from his Californian holiday home with the Governor of the Bank of England, Mervyn King.
But the chairman of Goldman Sachs Asset Management, Jim O'Neill, said that ending the crisis "will not be possible from the beach".
The Italian Prime Minister, Silvio Berlusconi, said last night that G7 finance ministers would meet "in a few days" and could pave the way for a full-blown summit of leaders "if the finance ministers manage to agree on a common plan of action".
British government sources said afterwards they were unaware of any such meeting being agreed but did not rule out the possibility. They said any decision to call the meeting would be made by the French, who hold the presidency.
In the UK, the FTSE 100 fell another 2.7 per cent – wiping £38bn off the value of Britain's companies – taking the week's losses to almost 10 per cent. The banking sector was again hit hardest, with Royal Bank of Scotland and Lloyds Banking Group, the two taxpayer-owned banks, both losing more than 20 per cent of their value this week.
Stock markets on the Continent were calmer, following signals from the European Central Bank that it will now intervene more directly in the debt crisis, while the US stock market was also up in early trading.
Mr Berlusconi announced a package of measures including further economic liberalisation and a constitutional amendment to make a balanced budget mandatory.
The French President, Nicolas Sarkozy, held calls with his Spanish and German counterparts, Jose Luis Zapatero and Angela Merkel.
A source at the European Central Bank said the Italian reforms were the price it had demanded to offer its support to the country. Norbert Barthle, an adviser to Ms Merkel, launched an attack on the European Commission president, Jose Manuel Barroso, blamed by many for sparking Thursday's stock-market falls after his call for a reassessment of the eurozone's bailout fund. Mr Barthle described Mr Barroso's remarks as "counter-productive".
The EU's Economic Affairs Commissioner, Olli Rehn, said a wide-ranging contingency plan to defend the euro, agreed at a special summit on 21 July, will be ready "in weeks, not months".
The former chancellor Alistair Darling warned of a real risk that Britain and the rest of Europe could go back into recession.
Economists warned that even if Europe were able to put its house in order, it was still hugely vulnerable to the slowdown in the US.Reuse content