07/29/2011 08:07 am ET Updated Sep 28, 2011

U.S. Debt Ceiling Concerns Spook World Markets With Default, Downgrade Both Possible

LONDON (AP) -- Concerns that American lawmakers won't agree a deal to raise the U.S. debt ceiling in the next few days continued to reverberate around markets Friday, with stocks down again.

If Congress doesn't raise the debt ceiling -- the amount of debt the government can accumulate -- by Tuesday, the U.S. could be forced to default on at least some of its obligations.

While investors have been jittery about that prospect for weeks, the inability this week of Republicans to even manage to get their own party to agree on a plan has reinforced those fears with just days to go.

Even if they do come up with a deal in time, ratings agencies could still downgrade U.S. debt -- which would push borrowing costs up and make it more difficult for Congress to reduce the amount of money the government owes.

"Even if the debt ceiling deadline is met, the current proposals on the table and lack of bipartisan support for dealing with the deficit issues in a credible and timely fashion, suggest that the risks of a U.S. credit downgrade are quite high," said Robin Bahr, an analyst with Credit Agricole.

A U.S. downgrade or default would harm an already fragile global economy. There were signs Friday that the global recovery was losing steam: eurozone inflation unexpectedly dropped and economists are predicting that U.S. growth figures set to be released later in the day will be poor.

Oil has been pushed down by the slow growth as well, with the main New York contract trading another 79 cents a barrel lower at $96.65.

In Europe, the FTSE 100 index of leading British shares as down 0.9 percent at 5,820 while Germany's DAX fell 0.9 percent at 7,127. The CAC-40 in France was 1.2 percent lower at 3,667.

Wall Street was poised for a decline in the open -- Dow futures were down 0.5 percent at 12,129 while the Standard & Poor's 500 futures fell 0.5 percent at 1,290.

The U.S. open though could well be impacted by the first estimate of economic growth in the second quarter. Economists are forecasting that the economy expanded at an annual rate of 1.7 percent, down from the previous quarter's 1.9 percent growth, amid weak consumer spending, dismal hiring and cuts in government spending.

While the main focus of concern this week has been on the debt debate in the U.S., there are mounting signs that last week's bailout deal for Greece hasn't been enough to assuage fears that bigger economies such as Spain and Italy will get sucked into the vortex of Europe's debt crisis.

Moody's warned Friday that the pressures on Spain have risen since the deal as it warned it could cut its Aa2 rating on the country in the next three months.

Though Moody's said a one-notch downgrade was the most likely outcome, investors are fretting that the uncertainty in Spain could get worsen in the coming months especially now that Prime Minister Jose Luis Rodriguez Zapatero has called early general elections for November.

Europe's debt problems are continuing to weigh on the euro even at a time when the dollar is being undermined by the U.S.'s own debt issues. By early afternoon London time, the euro was 0.5 percent lower at $1.4258.

Earlier in Asia, Japan's Nikkei 225 stock average closed down 0.7 percent at 9,833.03. Hong Kong's Hang Seng index lost 0.6 percent to 22,440.25 and China's Shanghai Composite Index shed 0.3 percent to 2,701.73.

South Korea's Kospi slid 1.1 percent to 2,133.21. Australia and Bombay also declined while Singapore gained 0.1 percent.