Top G20 officials discuss economic crisis

The deputy finance ministers of the world's 20 leading economies held a conference call to discuss Europe’s ongoing debt woes and the downgrading of the US’s credit rating.

­Investors around the world are nervous about how markets will react to the US credit downgrade, the first time since ratings began in 1917. Markets in the energy-rich Gulf countries and in Israel have already reacted negatively to the US downgrade on Sunday.

However, Dave Johnson from the Campaign for America's Future says “the affect on interest rates will be negligible.”

“I do not expect much reaction at all,” he stated. “Everyone knew that was likely. Also keep in mind, it is one rating agency, not three.”

The emergency conference call, which took place early on Sunday morning Korea time, came a day after Standard & Poor's cut the US credit rating. White House officials responded to the downgrade by accusing the rating agency of a $2 trillion miscalculation.

S&P admitted that, but was firm in its decision, saying the huge budget deficit is still a cause for major concern.

Rodrigue Tremblay, an economist from the University of Montreal in Canada, warned that the US economy could slide from the current crisis into an outright economic depression.

“The US government is paralyzed,” Tremblay declared. “It’s a bit like a ship without a captain in a storm. This is not very nice, very good, and it doesn’t look it will be very good for the next two years, because the election is only in 2012 and until then the US government is deadlocked and cannot make any serious policy decisions to counteract the economic downturn. And the danger is that the US economy can fall into an economic depression. And that’s what US politicians should be trying to avoid now.”

Meanwhile, the two other major rating agencies, Moody’s and Fitch, reaffirmed their top rating for the US.

Johnson argued that Standard and Poor’s downgrading is based on more on politics than economics.

“This is unusual,” he said. “Not long ago, when they extended the tax cuts on the wealthy in the United States, none of them spoke up. It seems to be more related to political a agenda than the economic agenda, because the economic conditions are not as bad as we hear.”

And while officials from rich and developing countries discussed global financial market stabilization, the European Central Bank has been holding an emergency telephone conference on how to avoid financial collapse in Italy. The central bank leaders discussed the possible purchases of Italian government bonds.

But Economic journalist Patrick Young says Italy is too big to be rescued in the way that other EU economies have been.

“The Italian government owes 1.8 trillion euros,” he said. “That means nothing to anybody, but that is bigger than the total government debt of Ireland, Portugal and Greece put together. Before the end of this year, Italy needs to sell debt which is equivalent to the whole of the Greek government bond market.”

Young says that the euro-zone needs to rethink its current approach.

“They need to consider the idea that perhaps they should look at the idea of re-working the existing debt in the system,” he said. “Perhaps there are ways… to restructure markets. The difficult [thing] is that the governments were too slow to react.”

­The G20 states, meanwhile, agreed to a number of possible actions to stabilize the global financial market. In addition, Finance Ministry representatives from the G7 group of countries are also set to meet ahead of the opening of Asian markets on August 8.