Barack Obama walks towards the podium before making a statement at the White House. Photograph: Alex Wong/Getty Images
Barack Obama tried to stem a fresh tide of selling on global markets on Monday when he said America's loss of its prized AAA rating should provide a "new sense of urgency" for Washington to tackle its chronic debt problem.
The president called for an extension of tax cuts to boost the world's biggest economy but the insistence that the US would always be a "AAA country" had little impact on Wall Street, which continued to plunge after his address.
The Dow Jones average was down 500 points by early afternoon as markets had their first opportunity to pass judgement on the decision by S&P to downgrade the US's sovereign credit rating following months of wrangling between Democrats and Republicans on Capitol Hill.
US banks, in particular, were badly hit. The Bank of America was down nearly 18%, Citigroup 17% and Morgan Stanley 14% as investors feared a second credit crunch could engulf the sector.
London witnessed a resumption of last week's panic selling, with the FTSE 100 index falling by more than 100 points for the fourth successive day – for the first time in its 27-year history.
On another bleak day in the City, a further £46bn was wiped off the value of the FTSE, bringing the total cost of its losing streak to £210bn. The index closed 178 points lower at 5069 and has dropped by more than 800 points since 29 July. Only one company in the FTSE saw its shares rise on Monday and with Wall Street in turmoil, early indications were that shares in London would again open loweron Tuesday.
Markets in the rest of Europe also registered sharp declines despite the success of the European Central Bank in driving down the interest rate on Italian and Spanish bonds – a key concern for investors during last week's turmoil. Dealers said the ECB had been aggressively buying bonds to prevent interest rates hitting the levels that led to bailouts for Greece, Ireland and Portugal. At the close, both Italian and Spanish yields had fallen by almost a percentage point to just over 5%.
Oil prices fell sharply amid fears the global economy was about to enter a double-dip recession. Brent crude was down by $4 at $105, while the search for a haven sent the price of gold soaring by $70 an ounce to a fresh record of $1,721 an ounce.
US bonds were also snapped up by nervous investors, who took no notice of the downgrade by S&P late on Friday night. The price of 10-year Treasury bonds rose, pushing the yield down to 2.35%.
In a press conference S&P chairman, John Chambers, defended the decision to cut America's rating to AA+, the first time it has not had the top grade on its debt since 1917. "We think elected officials across the spectrum are unable to proactively take measures to put US public finances on a sustainable footing in the same sort of matter as some of our most highly rated governments," Chambers said.
The press conference was part of a PR offensive with Chambers and David Beers, head of the ratings agency's sovereign ratings unit, appearing on several US morning TV shows to rebut suggestions that they got their maths wrong. Beers called the attacks "simply a smokescreen for the unhappiness, in our view, about our decision". S&P followed up the US downgrade by trimming the credit rating of the US's massive government-backed lenders Fannie Mae and Freddie Mac.
Shares in Bank of America (BoA) were especially badly hit after AIG, the insurance giant that was bailed out by the US government, launched a $10.5bn lawsuit alleging "fraud, misrepresentations and omissions" in deals on mortgage-backed securities. AIG alleges that BoA wrote subprime mortgages to borrowers it knew could not repay and then sold on the loans.
Obama said the markets continued to believe the US was AAA, noting that the veteran investor Warren Buffet considered America to be AAAA. S&P cut the credit rating on Buffet's Berkshire Hathaway investment company.
Jack Ablin, chief investment officer at Harris Private Bank, said: "It is hard to tell when this is going to end." He said investors appeared to be ignoring news from Europe where the ECB has stepped in to aid in Italy and Spain.
Ablin said investors seemed to be agreeing with S&P. "Unfortunately Congress has had a poor record of making difficult choices. This is an indictment of the process, not so much the US's ability but their willingness to tackle the debt."
Mark Zandi, chief economist of Moody's Analytics, said in a note to clients that the selloff should be short lived. He said the downgrade was "a blow to the American ego, but it should be nothing more than that. The timing was especially inopportune given the fragile collective psyche, thus its immediate impact may be amplified, but it should produce no long-lasting repercussions. If history is any guide, there is no meaningful probability that the US will default on its debt."
US investors are betting that volatility will continue. The Chicago board options exchange volatility index, or VIX, the so-called "fear gauge" jumped 21% in early trading Monday.
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