Tuesday 16 January 2018

Debt crisis: Nightmare on Wall Street as Europe tanks too

ECB president Jean-Claude Trichet. Photo: Getty Images
ECB president Jean-Claude Trichet. Photo: Getty Images

Independent.ie reporters

European stocks finished the day at record lows with similar sentiment on Wall Street after investors had a chance to digest the news that the US had lost its AAA credit rating.

Standard & Poor’s earlier cuts its US rating by one notch to AA+ while competitor Moody’s maintained its AAA analysis today but warned that this could be short-lived if debt reduction measures don’t go far enough.

Ongoing concerns about the euro debt crisis also weighed on stocks as well as growing fears of a double dip recession.

In Europe, some indices closed record lows with billions wiped off the value of shares and pension funds.

A record slump for London's FTSE 100 Index was recorded after it dropped 3.4pc, or 178 points, to close at a year-low of 5,068.95 points.

It was the first time in its 27-year history that it suffered falls of more than 100 points for four sessions in a row.

Germany’s DAX finished down over 5pc falling below 6,000 points for the first time in a year.

In Paris, the CAC-40 slid 4.7pc to 3125.19 points while in Madrid, the Ibex-35 fell just under 2.5pc to 8,459.40.

However, there was some cheer on bond markets after the European Central Bank finally entered the secondary markets and bought up the debt of Italy and Spain – many believe these two economic giants could be the in the queue to get a bailout.

The cost of borrowing for these countries fell to the lowest since the formation of the euro after the intervention while the cost of Ireland’s borrowing fell below 10pc.

When European markets closed the US was still in the doldrums.

US President Barack Obama is due to make an unscheduled address later this evening (Ireland time) in a move designed to calm markets.

Apart from the cut to AA+, ratings agency Standard & Poor’s warned that further US downgrades are possible.

It also cut, as expected, the ratings of US lending giants Fannie Mae and Freddie Mac because of their dependence on the US government after being bailed out during the 2008 financial crisis.

Commodities like oil also tumbled yesterday as investors fled to so-called safe havens like gold which hit a new high of over $1,700 per ounce.

Japan's Nikkei index finished more than 2pc lower earlier today as Asian markets caught up with the sell-off in European and the US last week.

Finance ministers from the world's 20 major economies have vowed to take "all necessary measures" to support financial stability and growth.

But investors are still not convinced that enough it being done and they are also concerned that that the ECB’s moves are too little too late.

Some analysts believe the European Financial Stability Facility (EFSF) will have to be increased from €440bn to over €1 trillion to make it credible.

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