Markets facing fresh chaos on US downgrade
World equities, fresh from their worst week since the 2008 global financial crisis on eurozone debt fears, face more turmoil after Washington lost its AAA rating, analysts said Saturday.
Standard & Poor's cut the rating to AA+ with a negative outlook, saying US politicians were increasingly unable to come to grips with the country's huge fiscal deficit and debt load.
"The news that S&P finally pulled the trigger... will surely rock the financial markets when they open on Monday," said Capital Economics analyst Paul Dales.
And he warned: "If the market mayhem continues, the risks of a recession will rise further."
European markets had slumped last week on concerns that the eurozone debt debacle -- which threatens to engulf Italy and Spain -- and the faltering US economy could spark another vicious worldwide downturn.
London's FTSE 100 index plunged by almost ten percent, wiping £150 billion ($246 billion, 173 billion euros) off the value of top British companies, to register its worst weekly loss since November 2008.
Wall Street also suffered its worst week since the financial crisis, shedding 5.75 percent despite Friday's better-than-expected US jobs report and hints of progress in Europe's debt crisis.
The S&P move, which followed persistent downgrade rumours in markets, will send investors hunting for safer assets and away from risky equities, according to Lloyds TSB Corporate Markets economist Charles Diebel.
"The key theme will be risk off -- so equities will be marked lower," Diebel said.
And CMC Markets analyst Michael Hewson added: "The effect on the US dollar is not likely to alter that much -- it's been on a downward trend for quite some time now. The stock market could be a different matter."
Saxo Bank economist Steen Jakobsen described recent turmoil as evidence of a second financial crisis, as many western nations buckle under vast debts that were incurred in the 2008 banking crisis and subsequent global recession.
"Welcome to the official Crisis 2.0 which is now in progress," Jakobsen told AFP.
"Crisis 1.0 was the failure of the banking system to sustain the losses from the (US) subprime loans.
"This created a run on the banks, which the policymakers solved by moving the debt burden from the private sector into the government sector, under the presumption that governments would be able to finance these debt obligations cheaper and guaranteed by tax issuance.