S & P, one of the principal credit rating agencies, viewed the contrived bipartisan debt deal as falling short of what was needed to mend Federal finances. There was little consolation, in the midst of a slew of negative data, for the better than expected job addition of 117,000 in the private sector in July keeping the unemployment rate at 9.1 per cent. The bleak unemployment scene, coupled with the collapse of housing market, has drained consumer confidence deeply hurting US growth recovery.

Although the debt deal law signed by President Obama, after weeks of partisan battles between Republicans and Democrats, provided for cut in spending by 2.1 trillion dollars over 10 years, S and P said it was short of what, in its view, would be necessary to stabilize Government’s medium-term debt dynamics. The deal also dealt a severe blow to confidence in US Congress or President Obama, according to most recent polls.

While US Treasury denounced the downgrade as 'flawed', China expressed concern, being the largest investor in US securities with over one trillion dollars, and still investing though on a reduced scale. A Xinhua news report,quoted by BBC, said China has every right to demand the United States address its'structural debt problems and ensure the safety of China's dollar assets'. The report reverted to China's plea for a new global reserve asset in the international monetary system so as to 'avert a catastrphe caused byany single county'.

Now as Congress comes back from recess in September, he expects to launch rearguard action “to move quickly on things that will help the economy create jobs right now”. He would seek to extend the payroll tax credit and unemployment insurance and put construction workers back to work rebuilding America and getting long-term fiscal house in order. “There is no contradiction in doing all this and getting our long-term fiscal house in order, as the more we grow, the easier it will be to reduce our deficits” he says. There is no expectation that Republicans will in any way give in to any of the President’s priorities.

In Europe, France and Germany were in urgent consultations during the week-end over calling for a special meeting of G-7 nations to discuss the volatile financial crisis.

In the United States, taken by surprise over S and P downgrade, Federal authorities saw it unjustified at this stage. The move would raise borrowing costs eventually for Government, corporates and consumers while US Treasury bonds, considered the safest haven, could well now be rated on par with or even lower than bonds of major European countries or Canada.

Moody’s, the other leading credit rating agency, which had also held out a threat of a downgrade before the Congressional deal, has deferred any action for the present. S & P had likewise warned on more than one occasion and has now reduced US credit rating from AAA to AA, the first time since it began assigning grades to countries in 1941. It said the outlook for US credit rating is negative, which signals another downgrade is possible in the next 12 to 18 months.

The sharpest fall in global stocks was on August 4, with investor fears intensifying about global economy slowing down and worries about resurgence of Europe’s debt crisis, this time centered on Italy and Spain, even as Eurozone leaders had hardly done with a second bail-out for Greece within a year. Ireland and Portugal are the two other countries also covered by EU/IMF support to overcome their debt and deficit problems.

Stock market indexes in the United States and Europe dropped more than 4 percent as Japan intervened to weaken its currency and the European Central Bank began buying bonds to try to calm markets. At the close of business on August 4, the Standard & Poor’s 500-stock index was down 60.27 points, or 4.78 percent, the Dow Jones industrial average fell off 512.76 points, or 4.31 percent, to 11,383.68, and Nasdaq was down by 5.08 per cent to 2,556.39.This was the biggest percentage drop since February 2009, market reports said. Stock value losses ran into hundreds of billions of dollars.

The American economy has considerably slowed down since beginning of 2011 and GDP rose by a mere 0.4 per cent in the first quarter and by 1.3 per cent in the second quarter. Decline in manufacturing output was reported from major economies and the index of new orders for goods in USA showed a contraction for the first time since June 2009 (the month when the recession, which had set in in December 2007, was deemed to have ended).

In Asia, where China’s economy had slightly moderated in the second quarter to 9.4 per cent, and India was revising down its 9 per cent target to between 8 and 8.5 per cent, policy-makers were putting themselves on alert to respond to the emerging mix of slowdown and financial crisis in advanced economies. These could have spillover effects on Asian economies both in trade and finance, even as some of the major economies like India are battling with high inflation. The synchronized downturn in global stocks epitomized that emerging and developing countries can in no way de-couple themselves from the risks that arise from time to time in USA and Europe.

In Washington, the focus will now be on the Federal Reserve which meets on August 9 to review the emerging trends and consider whether the economy needs more support by way of purchase of Treasury securities, the earlier phase of “quantitative easing” to the extent of 600 billion dollars having been completed in June. Fed has kept the interest rate near zero since 2008 and is likely to continue it for an extended period since inflation has so far remained but it has to take a view whether the continuing high levels of unemployment warrant additional boost to the economy. (IPA)