US loses AAA rating, China calls for new stable global reserve currency

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The United States lost its top-tier AAA credit rating from Standard & Poor’s on Friday, hours after investors alarmed by the euro zone debt crisis forced Italy to speed up an austerity drive. China, the largest foreign holder of US government debt, made clear that Washington only had itself to blame and called for a new stable global reserve currency.
In a sign of how concerned world leaders are about a slide in stocks that wiped about $2.5 trillion off global markets this week, Italian Prime Minister Silvio Berlusconi said finance ministers from the Group of Seven nations would meet in “just a few days” to seek a common plan of action. No other member of the group – which does not include world no 2 economy China – has confirmed the meeting. Worries the euro zone debt crisis was spreading and the US was slipping into recession drove a week-long rout in financial markets.
Better-than-expected jobs growth in July helped support Wall Street on Friday but stocks slipped back into the red in late trading. The S&P cut in the US long-term credit rating by a notch to AA-plus was an unprecedented blow and resulted from concerns about the nation’s budget deficits and climbing debt burden. The move is likely to eventually raise borrowing costs for the American government, companies and consumers. By calling the outlook “negative”, S&P signalled another downgrade is possible in the next 12 to 18 months. It blamed in part the political gridlock in Washington, saying politics was preventing the US from addressing its deficit and debt problems, a view supported in Beijing.
“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China’s official Xinhua news agency wrote in a commentary. “International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” it said. While the impact of the rating cut on financial markets when they reopen on Monday may be modest because the decision was expected, the shift may have a major long-term impact for the U.S. standing in the world, the dollar’s status, and the global financial system.