US debt fears hit world markets

[July 28, 2011]  LONDON (AP) -- The political brinkmanship over raising the U.S. debt ceiling continued to weigh on markets Thursday amid fears that a deal won't be clinched in time to prevent the world's largest economy from a potential debt default.

Investors are anxious that a deal to raise the country's $14.3 trillion borrowing limit won't be in place by the August 2 deadline.

The House of Representatives plans a vote Thursday on a Republican plan to cut spending and raise the borrowing limit. The Democratic-controlled Senate is watching what happens before moving ahead with its own vote.

If there is no legislation in place by Aug. 2, officials say the Treasury will not be able to pay all the nation's bills, which could trigger a debt default. Investors are worried such a default would send shockwaves through global financial markets, especially at a time when the U.S. economy is still struggling to recover from the worst recession in decades.

Currently, about 40 cents of every dollar spent by the U.S. government is borrowed. Lawmakers are divided over how to get the U.S. government accounts into a healthier state in the longer term, with many Republicans unwilling to consider any tax increases, which are being proposed by Democratic lawmakers.

Though most investors think a last-minute deal to raise the debt limit will eventually emerge, the difficulty of reaching an agreement may leave a lasting impact on investor sentiment.

"The rout in global equity markets continues as concern builds over the failure of U.S. lawmakers to serve up any meaningful progress regarding the debt ceiling," said Cameron Peacock, markets analyst at IG Markets.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,816 while Germany's DAX fell 1.6 percent to 7,140. The CAC-40 in France was down 1.1 percent at 3,691.

Another batch of disappointing earnings from the likes of German chemical company BASF SE, French telecoms network company Alcatel-Lucent SA and Swiss bank Credit Suisse did little to shore up sentiment.

Wall Street was poised for very modest gains at the open after a big drop the day before. Dow futures were up 0.1 percent at 12,254 while the broader Standard & Poor's 500 futures rose a similar rate at 1,300.

While the U.S. debt showdown remains the talk in the markets, economic indicators have mostly been negative, both in the U.S. and the eurozone.

A survey showed economic sentiment in the 17 countries that use the euro at a one year low. The EU's economic sentiment indicator fell to 103.2 in July from 105.1 the previous month as confidence declined all across the single currency zone. The drop was steeper than anticipated -- the consensus was that it would only slip to 104.

"Any hopes that growth in the core economies might support the periphery and shield the eurozone as a whole from a marked economic slowdown must be fading fast," said Jennifer McKeown, senior European economist at Capital Economics.

Following the figures, the euro faltered. From being around 0.2 percent higher before the data, the euro is trading 0.4 percent lower on the day at $1.43 by late morning London time.

Later, investors will have weekly U.S. jobless claims and pending home sales figures to digest.

Earlier in Asia, Japan's Nikkei 225 stock average sank 1.5 percent to close at 9,901.35 and South Korea's Kospi fell 0.8 percent to end at 2,155.85. Hong Kong's Hang Seng Index edged up 0.1 percent to close at 22,570.74.

Mainland China's Shanghai Composite Index declined 0.5 percent to 2,708.78 while the smaller Shenzhen Composite Index lost 0.1 percent to 1,189.13.

Worries over the global economy and the U.S. debt situation have been weighing on oil markets, too. However, the main New York price of oil was up 8 cents at $97.46 a barrel following a $2 or so decline on Wednesday.

[Associated Press; By PAN PYLAS]

Kelvin Chan in Hong Kong contributed to this report.

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