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Turmoil as America loses its AAA credit rating

THE United States was left reeling today after Standard & Poor’s lowered its AAA rating for the first time in 94 years. The rating was cut by one notch to AAplus in an unprecedented blow, because of concerns about the American budget deficit and climbing debt burden.

Consumers now fear a hike in mortgage, credit card and other borrowing rates if the move scares buyers away from US debt. The news came as Romano Prodi, former president of the European Commission, warned the eurozone is at “serious risk” of collapse. Mr Prodi attacked holidaying national leaders for allowing a dangerous “problem of power in Europe” to emerge amid conflicting statements from competing EU and eurozone officials. “We don't know who is in charge,” he said.

His comments came on the heels of a dire warning by one of Europe's senior economists that a political and economic catastrophe was looming. Giovanni Perissinotto, chief executive of Italian Insurance giant Assicurazioni Generali, said: “Europe faces a serious risk of breaking up into its constituent parts and finding itself and its various member states impoverished,” For the first time since the beginning of the crisis, Italy's borrowing costs rose above Spain's, threatening to engulf the single currency's third biggest economy.

At the close of trading last night London's FTSE 100 index was down 10pc on the week, and European stock markets hit their lowest levels since the height of the financial crisis in November 2008. Worries the eurozone debt crisis was spreading and that the US was slipping into recession have driven the rout in financial markets. The US rating cut was announced hours after investors, alarmed by the eurozone debt crisis, forced Italy to speed up an austerity drive. Italy buckled to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank help with funding.

Following a frantic round of telephone diplomacy, Italian Prime Minister Silvio Berlusconi said his government would bring forward the cuts, a year ahead of schedule, and rush through welfare and labour market reforms. He also said finance ministers from the Group of Seven industrialised nations would meet in “just a few days” to seek a common plan of action. In the US, in addition to cutting the rating, S&P said the outlook was “negative”, a sign that another downgrade is possible in the next 12 to 18 months.

While the impact of the rating cut on financial markets, when they re-open on Monday, may be small because the decision was expected, it may have a major long term impact for the US’s standing in the world, the status of the dollar and the global financial system.