Rocky day

Credit rating agency Standard & Poor's cut its assessment of the United States from its long-held and prized triple-A level to AA+, an unprecedented blow to the country widely seen as the world's safest investment.

S&P also called its outlook on the US rating to "negative," and said it may lower the rating another notch to AA in the next two years if the government does not cut spending as much as it has currently pledged, or if interest rates worsen the country's financial standing.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," the agency said in a statement.

It went on to say that the "effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

On Tuesday, President Barack Obama signed into law a bill agreed on by Democrat and Republican leaders to raise the $14.3-trillion federal debt limit, thereby avoiding default. The bill also included up to trillions of dollars in spending cuts.

The two other main ratings agencies, Moody's and Fitch, said they are studying the deficit-reduction plan to determine whether the US deserves to keep its AAA rating with them.

A spokesman for the US Treasury hit back at S&P, saying: "A judgment flawed by a $2-trillion error speaks for itself."

Markets in trouble

European markets meanwhile took another beating heading into the weekend, with the main share indexes in Frankfurt and London, the Dax and the FTSE 100, both dropping by over 2.7 percent at the close of trading on Friday. France's CAC 40 also ended the day in the red. The eurozone's bluechip Euro Stoxx 50 index fell by 3.3 percent.

The damage was limited to some extent by a surprisingly positive report from the United States Labor Department, which revealed that the world's largest economy added 117,000 jobs in July, more than the 85,000 economists had predicted.

However, this only had a marginally calming effect on investors, who are worried about another recession in the United States and that the eurozone debt crisis could spread to Italy and Spain.

After the US markets closed on Friday, the Dow Jones industrial average finished up a half a percent since Thursday, but was down 5.75 percent since the start of the week. Thursday saw the biggest single-day plunge in the stock market since late 2008.

On Friday, President Obama offered his reassurance that the US economy was not in another tailspin like the one that struck in late 2008 and 2009.

"What I want the American people and our partners around the world to know is this: we are going to get through this, things will get better," he said at an event at Washington's Navy Yard on Friday.

Appeal for calm

The European Union's economy commissioner, Olli Rehn, also tried to steady jittery markets on Friday. At a news conference in Brussels, he offered a reminder that measures set up by eurozone leaders to fight contagion should be finalized by early September.

"I'm confident that once investors understand that all this work is under way behind the scenes, they will be reassured," Rehn said.

The 17 eurozone members held a crisis summit at the end of July in which a plan was adopted to grant Greece a second bailout while laying out a strategy to contain the debt crisis from spreading to countries like Italy and Spain. The plan, however, has not yet been executed.

"We are talking here of a matter of weeks, not months," Rehn added. "In order to end the uncertainty, the technical and political processes should be finalized by early September."

Friday's rough day on the markets was foreshadowed in late trading on Thursday, when investors also slashed their European positions after the European Central Bank (ECB) failed to buy Italian and Spanish bonds. The bonds have reached budget-busting 6 percent yields, the highest level since the euro was introduced a decade ago.

Responding to the swarm of market speculation on Italy and Spain, Rehn pointed out "it's not as if the fundamentals of the Italian or Spanish economies have changed overnight." He also added that implementing austerity measures was critical in both countries.

Meanwhile, in Rome, Italian Prime Minister Silvio Berlusconi held a separate news conference, where he promised to balance the country's budget deficit by 2013. He also said the principle of a balanced budget would be enshrined in the constitution.

Asia calls for cooperation

Meanwhile, Chinese Foreign Minister Yang Jiechi called on global policymakers to tackle the festering problems that ail the global economy.

"Europe's debt problems are still developing, and the US sovereign debt default risk is escalating," Yang said on Friday during his state visit to Poland, the current holder of the rotating EU presidency.

The raising of the debt limit in the US came after a bitter political fight that shook investor confidence in Washington's ability to meet its financial obligations.

And despite Friday's perky jobs data, fears persist that the US could slide back into recession as its economy continues to falter.

"All countries must further increase communication and coordination, push ahead reforms in the global financial system, and improve governance of the global economy," Yang said.

Investors, meanwhile, are looking for new refuges to stash their wealth as gold prices rise and Switzerland and Japan intervene to prevent their safe-haven currencies from becoming too expensive.

Authors: Andrew Bowen, Matt Zuvela (dpa, Reuters, AFP)
Editor: Mark Rossman