Debt crisis: Global stocks tumble – rumours of French downgrade
Global stock markets tumbled again today as fears over the health of the US economy and rumours of a possible credit downgrade for France sent investors running for cover.
European shares fell to a two-year low while in London, the FTSE 100 closed down 157.8 points at 5,007, as a morning rally evaporated in the face of big falls for all of the main indices on Wall Street.
The mood in Britain was further dampened when the government said growth would be lower than earlier anticipated.
In the US, the Dow Jones Industrial Average had fallen by more than 400 points when European markets closed, giving back all of yesterday's late rally following a commitment to keep interest rates low until 2013 by the US Federal Reserve.
Bank shares across Europe were hit after rumours that France could see its AAA rating downgraded.
The CAC index in Paris and the Dax in Frankfurt both saw falls of more than 4pc at one point, while Italy's main index dropped by more than 5pc.
The French finance ministry has denied rumours that France was heading for a downgrade of its prized AAA credit rating.
The announcement came just hours after President Nicolas Sarkozy promised new measures to cut France's public deficit amid fears the country would follow the US downgrade from AAA.
These fears also meant a drop in the value of the euro today.
Investors are afraid that there will be a double dip recession and global debt are overriding the US Federal Reserve’s decision to keep interest rates at an all-time low.
Earlier markets in Europe had bounced earlier in the day taking their lead from gains on Wall Street last night and later Asian markets.
The US Fed said last night it would keep interest rates at near zero until the middle of 2013 to help the ailing economy.
World markets have been in turmoil for more than a week as investors feared that the debt crises in the US and the eurozone would lead the global economy back into recession.
Markets have become increasingly fearful about the world's biggest economy after its recovery slowed in recent months and credit ratings agency Standard & Poor's stripped the US of its prized AAA status.
World markets have fallen some 15pc since July 22, which has wiped about $4 trillion £2.5 trillion) from their value.
Although the Fed disappointed markets by failing to announce fresh stimulus measures by pumping money into the economy, it said it had discussed the range of tools at its disposal, which hinted that more money printing could be on the cards.
And the pledge that interest rates would stay "exceptionally low" for at least two years had helped restore some confidence to beleaguered markets, although this was short-lived.
Analysts have warned that markets will still show volatility because the underlying cause of the recent bloodbath had not been solved.
Ben Potter, market strategist at IG Markets, said: "The reasons behind the recent turmoil - slowing US growth and European debt contagion - are still present.
"Our view is that the recent rally was nothing more than a very aggressive short covering rally - if you stretch the rubber band enough one way, it will eventually snap back hard in the opposite direction."
He added that the Fed was effectively "out of bullets" because its options to inject fresh life into the sluggish economy were limited.
Eurozone leaders intervened this week by buying bonds to shore up the finances of debt-ridden Spain and Italy, which has also helped to restore confidence in markets.