G7 leaders in economy crisis talks after US downgrade

WORLD leaders were last night in frantic discussions as they attempted to tackle the international economic crisis after the US economy was stripped of its AAA credit rating for the first time in its history.

Finance ministers from the G7 industrialised nations contacted one another amid fears that the downgrading of the world's largest economy could undermine US recovery and trigger further calamitous falls on the stock markets when they open tomorrow.

The US crisis comes on top of the troubles in the Eurozone which has already prompted calls for an emergency meeting of the G7. G7 politicians talked yesterday about launching co-ordinated action to calm the markets after America suffered the humiliation of the credit-rating agency Standard & Poor's reducing its economic status from AAA to AA+.

That led to President Barack Obama issuing a statement that called for American political parties to work together to strengthen the country's finances.

Yesterday, the French finance minister, Francoil Baroin, whose country currently holds the G7 presidency, said he had been in touch with his G7 counterparts "this very morning".

"We'll be carefully watching the evolution of what might happen on Monday," Baroin said. Finance ministers spoke over the telephone, but it has not been decided yet if there should be an emergency meeting of the G7, which is made up of France, Britain, Canada, Germany, Italy, Japan and the US.

Finance ministers were looking at co-ordinating action among central banks to bring some stability to money markets.

The downgrading of the US economy will have a knock-on effect in Europe, which has close trading links to America.

In the UK, Vince Cable, the Business Secretary, insisted that Britain was in a good position to weather the storm, because of the deficit reduction plan put in place by the Conservative/Lib Dem coalition.

But there was more embarrassment for the US when it was rebuked by China for its "addiction" to debt.

China, America's largest creditor holding $1.3 trillion of US debt, warned of more turmoil in the financial markets and said it had every right to demand that the US sort out its debt problems.

The Chinese state news agency Xinhua said Washington only had itself to blame for its plight and warned that unless the US cut its "gigantic military expenditure and bloated welfare costs", another downgrade would be inevitable.

"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 gone," Xinhua said.

The downgrade, which reflects an increased risk that the US may struggle to pay back all it owes, could erode investors' confidence in the US economy, which, in addition to enormous debts, is struggling with unemployment of 9.1 per cent and fears of a double-dip recession.

The other two major credit rating agencies, Moody's and Fitch, said on Friday night they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

S&P had threatened the move in July if Washington failed to deliver what it judged to be a serious plan to tackle the country's deficit, and on Friday night after several discussions with administration officials, the agency took the step designed to keep pressure on Capitol Hill to go further than it has in addressing its $14 trillion of debt.

Obama responded by issuing his statement through White House spokesman Jay Carney, who said: "It is important that our elected leaders come together to strengthen our economy and put our nation on a stronger fiscal footing.

"We must do better to make clear our nation's will, capacity and commitment to work together to tackle our major fiscal and economic challenges."