Debt, downgrade and Saudi Arabia - Arab News

August has so far been a very volatile month for financial markets, with fears rising that the world will return to recession, a debt deal in the US proving insufficient to prevent a downgrade of the government's credit rating and an escalation of debt problems in the euro zone. The chances of a new recession have risen, though the more probable outcome is a period of low economic growth. It is likely that the Kingdom's stock market will remain volatile, but oil prices are still at a level that will support the high government spending that will drive the Saudi economy, according to a report prepared by Jadwa Investment Research Department.

Late on Friday credit ratings agency Standard and Poor's (S&P) cut the rating of the US government. Prior to this the US's credit rating had always been at the highest level available (a rating of AAA). A credit rating is a measure of the creditworthiness of a borrower; the lower the rating, the more likely that a borrower will default. S&P's move was triggered by disappointment about the recent deal to extend the ceiling on the amount of debt the US government could issue. Although the deal was concluded before the debt ceiling was hit, which meant that the US government was able to make all scheduled payments, S&P considered that the deal did not go far enough to tackle the debt problems the country faces. It also highlighted that the political climate in the US, which was the main barrier to extending the debt ceiling, complicated the prospects for a long-term debt deal, the report said.

Another factor contributing to the volatility is mounting concern about the spread of the debt problems in the euro zone. Specifically, Italy and Spain were forced to pay much higher rates to borrow through financial markets owing to weak economic growth, continuing budgetary stresses and political uncertainty. The Jadwa report said new framework established by EU institutions to deal with the debt problems in Greece, Ireland and Portugal in late-July would be overwhelmed if it were extended to cover Italy and Spain given the far greater size of these countries' debts (total financing needs for Italy and Spain over the final five months of 2011 are around 245 billion euros ($350 billion), greater than the value of Greek debt maturing over the next six years before it was restructured).

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