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Politicians move to battle debt crisis

Markets in the Far East fell last night and the FTSE 100 fell this morning as politicians continue to battle the debt crisis.

In the Far East markets reacted badly to news of America’s downgrade with Japan’s Nikkei 225 falling 2.18 per cent to 9098 by close while in China the Shanghei Composite index fell 3.77 per cent to  2527.  

The FTSE 100 fluctuated this morning and by 10am had fallen 0.76 per cent to 5207. This follows a fall of nearly 10 per cent last week.

Over the weekend, Standard & Poor’s announced it had downgraded America’s credit rating for the first time, from AAA to AA+, due to concerns about the way American politicians are responding to the escalating debt crisis. In Europe, the European Central Bank is to purchase Euro member state bonds in an attempt to allay debt concerns.

Latest news on the debt crisis:

  • The Telegraph reports that Bank of England governor Mervyn King is expected to reduce the UK’s target range for growth.
  • In an interview with The Sunday Times, Business Secretary Vince Cable warned that Britain could face a double-dip recession but rejected comparisons with the 2008 credit crisis.
  • The European Central Bank has announced it is purchase Euro member state bonds in an effort to halt financial market contagion as markets opened this morning. A statement from the ECB, released yesterday, welcomed deficit cutting measures taken by Italy and Spain and welcomed a statement from France and Germany which pledged that the European Financial Stability Fund would take over paying for the purchases when it is fully up and running. The move is seen as a watershed moment because until now the ECB has maintained that responsibility for dealing with the Euro crisis rests with National Governments.
  • Italy brought forward a pledge to balance the country’s budget from 2013 to 2014 to enable the move. Interest on Italy’s 10 year bonds reached 6.08 per cent on Friday, after hitting 6.4 per cent, the highest level since 1997. Spain’s bonds were offering 6.05 per cent. Some economists argue that anything higher than 7 per cent makes borrowing to fund Government spending unsustainable.
  • On Sunday Angela Merkel appeared to support the move in a statement with Nicolas Sarkozy saying it was up to the ECB to decide when there was a material risk to financial stability. However, its been reported Merkel complained to Chancellor George Osborne in a phone call about European Commission President Jose Manuel Borroso’s claim more action was needed beyond what was agreed by European leaders in July.
  • The IMF has welcomed the statements from the European Central Bank, Germany, France and the G7.
  • Amid reports accusing European leaders of being absent in a crisis, George Osborne also called G7 leaders on Saturday from his holiday in California, stressing the interconnected nature of the European and American debt crises. Speaking to European Monetary Commissioner Ollie Rehn he suggested launching Eurobonds in exchange for more control over member states’ domestic economies.
  • Standard and Poor’s is warning this morning that Asian sovereign ratings could face downgrades if global financial markets deteriorate. The ratings agency says its downgrade of US debt to AA+ on Friday would not weigh on Asian Governments ratings in the near term but added Asia-Pacific economies would have to support their domestic economies.
  • The Australian market dropped 2 per cent as it opened and briefly rallied during the day but at close the S&P/ASX200 index was down 2.9 per cent.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. When are the politicians going to wake up and realise that what is required is a European Federal Reserve which can issue European bonds as per the US model.

    Whoever decided to launch a single currency without this in place should have been shot.

  2. Does no one talk of the elephant in the room? Inflation is running at over 5%pa and has been for some 3-5 years now. Do that for 10 years and you half the value of the debt. This is the stealth plan that the world govs are hoping will control the debt. Meanwhile the deficit continues to grow each year. So thats the plan? Inflate out of the debt and get spending down to income……. bewarned savers, this will hurt!

  3. The federal reserve system works in the USA because all the states are included in it and they all fall under a common fiscal regime which is not the case in the EU

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