The European Central Bank will hold a conference call of its governing council to discuss its response to the debt crisis, an ECB source said. Italy's pledge to speed up austerity measures and whether the ECB should buy Italian government bonds are expected to be discussed. S&P's downgrading of the US credit rating on Friday added to fears over debt levels and economic growth in the world's biggest economy and in large European nations, such as Italy and Spain. As the effect was felt across the globe, China, the largest foreign holder of US debt, issued an extraordinary demand that Washington change its economic ways and address its "debt addiction". It said the rating reduction would be followed by more "devastating credit rating cuts" and global financial turbulence if the US failed to learn to "live within its means". "China, the largest creditor of the world's sole superpower, has every right to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," it said. It also insisted the US should slash its "gigantic military expenditure and bloated social welfare costs", and repeated its demand for a new global reserve currency to replace the dollar. In London, opinion was split between those who believed the markets would take the US credit decision in their stride and others who believed it could trigger a series of events that would do untold damage to the global financial system. "The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," the statement continued. America did receive some support yesterday, with Francois Baroin, France's finance minister, insisting that he had total confidence in the US economy, while Russia said it would keep the current level of its US investments in national reserve funds.
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UK London - Government sources said there was little or no likelihood that either the Prime Minister, who is in Italy, or Mr Osborne, the Chancellor, who is in California, would return to Britain from their respective holidays. Mr Osborne is, however, expected to take part in an emergency conference call of G7 finance ministers – representing the world's seven largest industrialised nations – this weekend.
Coalition sources did their best to strike an upbeat note, stressing that the US credit downgrade imposed by Standard & Poor's was in effect a "vindication" of Mr Osborne's tough deficit-reduction plan.
"We're not crowing but we feel as though we've been proved right," a well-placed government adviser told The Sunday Telegraph.
"We are sticking to our course as George has repeatedly said. That's what helps keep down the cost of borrowing. This is a prerequisite for jobs and growth."
The official said introducing a "plan B" to try to stimulate growth – a move demanded by Ed Balls, the shadow chancellor, who has called for a temporary cut in VAT – would be "disastrous".
Mr Balls said last night: "The problem in Britain is that George Osborne's plan is not working. By trying to go too far and too fast, confidence has been knocked and last year's recovery has been choked off. The government's reaction to the credit rating agency's downgrade is once again deeply complacent.''
Should I rebalance my portfolio?
Rebalancing means setting a target level for different broad types of investments — stocks, bonds, and money funds. For example, you might decide that you want 60% of your money in stocks, 30% in bonds, and 10% in cash. A big market meltdown can knock your portfolio out of balance — say, 50% stocks, 40% bonds, 10% cash. To rebalance, you sell enough of your bonds to bring the portfolio back to your intended allocations.
But it's a bad idea to make investment decisions based on short-term market gyrations. Investors who are saving for retirement "need to be focused on trying to remain practical, rational and unemotional," says Sheryl Garrett, founder of the Garrett Planning Network.
That said, consider the past week a good test of your tolerance for volatility. If you're losing sleep and experiencing heart palipitations, you may want to lighten up on your investments in stocks, "I truly believe that some people are having legitimate health-related concerns," Garrett says. "They can't live with this kind of volatility." Just be prepared to save more and work longer, she adds, because it's tough to earn returns that will stay ahead of inflation without investing in stocks.
Now is a "good time to open up your (401k) statement, look at your account balances and say, 'where am I and where do I want to be,'" says Bill Ebsworth, chief investment officer for Fidelity Strategic Advisers at Fidelity Investments. "It's a gut check. How comfortable are you with stock volatility?"
What's wrong with moving to cash?
Nothing — but you won't make any money. The average money market mutual fund yields 0.01%, says iMoneyNet. Many yield nothing at all.
You might get 2% interest or a bit more if you invest in a five-year bank CD, but then you'll be tying up your money for half a decade with very little interest. And, while money funds and CDs are very safe, they don't protect you from inflation, currently running at 3.6%.
Is there any good news?
Actually, there is. Low bond yields have pushed mortgage rates to historic lows, creating tremendous potential savings for homebuyers and homeowners who are eligible to refinance. The average rate for a 30-year, fixed-rate mortgage fell to 4.39% last week, says Freddie Mac.
And if you drive, you may notice some relief at the pump, too. Slowing economic growth has pushed oil prices down below $87 a barrel — levels last seen in February.
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