Financial turmoil

Most Asian markets opened down on Thursday morning, following another nightmare day's trading in Europe and the US.

European governments scrambled to reassure turbulent markets after the continent's major stock exchanges plunged Wednesday amid concerns that core eurozone economies such as France and Italy were saddled with unsustainable public debt.

London's FTSE-100 index fell by 3.05 percent and in Paris the CAC-40 dropped by 5.45 percent while in Frankfurt the DAX tumbled 5.13 percent. In New York, the Dow Jones closed down 4.62 percent.

The losses came as rumors swirled that France, which currently leads the Group of Seven (G7) industrialized nations, could lose its AAA credit rating less then a week after the world's largest economy - the United States - was downgraded to AA+ for the first time in history.

France's Finance Ministry subsequently denied rumors that its top-notch credit worthiness was on the line. The rating agencies Standard & Poor's, Fitch and Moody's confirmed that France still enjoys AAA status.

French austerity

French President Nicolas Sarkozy broke off his vacation at his Riviera holiday home Wednesday and returned to Paris in order to announce an austerity drive, giving his finance and budget ministers a week to draft ideas that would lend credibility to France's pledge to slash deficits.

"The head of state reiterated that the commitments to reduce the public deficit are inviolable and will be adhered to no matter how the economic situation evolves," Sarkozy's office said.

The shares of French banks, however, tumbled amid fears over their exposure to the ailing economies of Italy and Greece. Societe Generale plunged by 14.7 percent.

Bailout specter

In Italy, Prime Minister Silvio Berlusconi called parliament back early from its summer holiday in order to vote on a balanced budget amendment Thursday.

Rapidly rising rates on Italian and Spanish debt, coupled with the US downgrade, helped trigger the stock market turmoil last week. The European Central Bank (ECB) intervened to stave off a crisis and began buying the bonds off Italy and Spain, the eurozone's fourth and fifth largest economies respectively.

Previously, the ECB had only intervened to secure the debt of peripheral economies under the protection of eurozone bailouts - Greece, Ireland and Portugal.

"In sum, since the fall of Lehman Brothers, this is the worst crisis since the Second World War," ECB President Jean-Claude Trichet said, referring to the 2008 collapse of the US investment bank that triggered a global financial crisis.

Trichet said the ECB had been "extremely clear" with Italy and Spain about the need to "return to a normal budgetary situation."

Meanwhile, the specter of another eurozone bailout hovered over the small island nation of Cyprus, after the rating agency Fitch downgraded the country's credit rating to BBB, dangerously close to junk status.

Fitch predicted that Cyprus would need EU financial assistance to make ends meet and that "such assistance is likely to be forthcoming."

Author: Spencer Kimball, Mark Hallam (AFP, Reuters)
Editor: Nancy Isenson