Global financial markets continue their plunge in reaction to an unprecedented downgrade of the U.S. government's credit rating and lingering concerns about European debt problems and global economic growth.
In early Asia trading Tuesday, Hong Kong's Hang Seng index dropped more than 6 percent at the opening. Japan's Nikkei index was down almost 5 percent and Seoul's KOSPI index was down more than 6 percent. The Korean exchange briefly halted some trading for a second straight day. Stocks in Shanghai opened more than 2 percent lower.
On Wall Street Monday, the index that measures broad U.S. stock market activity, the S&P 500, was down almost 7 percent. Major indexes across Europe were down by 3-to-5 percent.
Monday's trading sessions were the first chance for most investors to react to the change in the Standard & Poor's rating, which was announced Friday evening after world markets had closed. U.S. government debt is now rated “AA+,” one level below the highest possible rating of “AAA.”
U.S. President Barack Obama said he disagrees with the S&P downgrade, but that he hopes it will prompt lawmakers in Washington to agree on what he called a balanced approach to debt and deficit reduction – including higher taxes for the wealthy and cuts in spending on social programs. Mr. Obama said the financial markets “continue to believe our credit is AAA.”
Meanwhile, an aide to the Senate Banking Committee says the panel is looking into S&P's decision to downgrade the U.S. rating. The aide, speaking on condition of anonymity, said the panel is gathering information, but did not say a formal investigation was under way. Committee Chairman Tim Johnson issued a statement saying the downgrade is an “irresponsible move” that could have a far-reaching impact.
S&P held a conference call Monday to defend its decision to downgrade the United States. Managing Director John Chambers, head of the committee that made the ratings decision, said increasing debt levels in the United States and the inability of Congress and the president to reach political consensus for significant deficit reductions were “no longer comparable with the most highly rated governments.”
The U.S. central bank will hold a regularly scheduled meeting in Washington beginning Tuesday, but no major changes in its monetary policy are expected.
U.S. Treasury Secretary Timothy Geithner says the S&P used “terrible judgment” when it downgraded the U.S. credit rating. Geithner says the S&P showed a “stunning lack of knowledge” about the mathematics used to draw up a federal budget.
In Europe, markets in Italy and Spain rose sharply after the European Central Bank said it would buy government bonds from both countries in an effort to calm fears about the eurozone debt crisis. But other major European markets lost ground.
Geithner said the United States has a very resilient and strong economy. He said U.S. treasuries are an absolutely safe investment and that there is no risk of the United States not being able to meet its obligations.
The other two major credit rating agencies – Moody's and Fitch – have so far kept the U.S. AAA rating.
S&P blamed Congress for months of political haggling over a deficit reduction deal that S&P says does not go far enough. The deal calls for cutting the deficit by more than $2 trillion over 10 years. S&P called for $4 trillion in savings.
