China scolds US over S&P credit downgrade
China scolds US over S&P credit downgrade
News of the downgrade ended a tumultuous week for US finances
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China has scolded the US over its "addiction to debt" after rating agency Standard & Poor's downgraded the US' top-notch AAA rating to AA+.
State news agency Xinhua said unless the US cut its "gigantic military expenditure and bloated welfare costs," another downgrade would be inevitable.
But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.
The downgrade ended a week of growing uncertainty for the world economy.
Fears that the US might be headed for a double-dip recession and the eurozone's debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.
The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.
This in turn could trickle down to higher interest rates for local governments and individuals.
Continue reading the main story Analysis
Robert Peston Business editor, BBC News
The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.
Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.
But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.
One initial estimate says that could add an extra $75bn (£46bn) to the US annual interest rate bill at a time when its debt levels are already high.
The other two major credit rating agencies, Moody's and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.
'Held hostage'
Xinhua called for the printing of US dollars to be supervised internationally and repeated China's contention that a new global reserve currency might be needed.
Analysts say neither suggestion is likely to happen. But China - the world's largest holder of US debt - is clearly worried about its holding and also worried about criticism at home for holding so much of the country's savings in US investments.
"The spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all," it said.
It said the US should stop "letting its domestic electoral politics take the global economy hostage".
Continue reading the main story S&P ratings (selected)
- AAA: UK, France, Germany, Canada, Australia
- AA+: USA, Belgium, New Zealand
- AA-: Japan, China
Source: S&P
In the wake of the downgrade, a European diplomatic source told Reuters news agency that the G7 group of major Western powers would confer by telephone in the coming days.
Francois Baroin, Finance Minister of France - which currently heads the G7 - said he had consulted his counterparts on Saturday morning and would closely monitor market reaction when they opened on Monday.
EU Economic and Monetary Affairs Commissioner Olli Rehn, who cut short his summer holiday to return to Brussels, said the world's major economies should co-ordinate their policies to avoid a global crisis.
http://www.bbc.co.uk/news/world-us-canada-14430598
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