US default prospects stalk global stock markets

The European debt crisis discouraged risk-taking with details of how private investors will participate in the second rescue of Greece still unknown.

World markets had largely surged last week on news of a eurozone deal, but sentiment was shaken early Monday after Moody's ratings agency downgraded Greek debt -- and warned the new bailout was almost certain to trigger a cut to default status.

At closing, London's benchmark FTSE 100 index slid 0.16 per cent to 5,925.26 points and in Paris the CAC 40 lost 0.77 per cent to 3,812.97.

Frankfurt's DAX 30 was the exception of the day, rising 0.25 per cent to 7,344.54 points.

The euro rose to $1.4364 while the dollar hit its lowest level against the yen since just after Japan's March 11 earthquake.

And gold closed at $1,613.50 per ounce after scoring another record high price of $1,624.07 in overnight deals as investors flocked to the safe-haven precious metal.

"Investors are worried about the implementation of announcements made last week on Greece," Franklin Pichard, director of Barclays Bourse in Paris, said.

According to the eurozone bailout agreement, several options will be presented to private investors in Greek debt-- including roll-overs of debt holdings into new bonds with long maturities or actual writedowns of debt, known as haircuts.

"As long as we don't know who will choose what, a great blur exists," Pichard said.

Moody's said the rescue raised the chances that Greece could stabilise and reduce its debt in the next few months, but the agency gave a muted assessment of the long-term effects for the eurozone of the complex rescue.

Moody's said that although the rescue offered a number of benefits for Greece as well as for the eurozone, "the impact on Greece's debt burden is limited."

But the debt drama in the US was the main driver on world markets Monday.

The White House and top lawmakers continued to scramble to reach a deal to save the world's richest country from a disastrous default on its debt, amid fears that inaction could affect markets around the globe.

"The prospect of a US default looms," Capital Spreads dealer Jonathan Sudaria warned.

President Barack Obama cancelled a pair of political fundraisers as Democrats and Republicans huddled separately in congress in a quest for a compromise without which the world's richest nation will run out of cash to pay its bills by August 2.

"Up until now markets had assumed that an increase of the debt ceiling, irrespective of the financial conditions thrashed out in Congress, was inevitable. However, the staunch resolution by both sides not to compromise has left traders to re-price the probability of a default," Sudaria said.

The International Monetary Fund pressed polarized US politicians to raise the US debt ceiling "expeditiously to avoid a severe shock to the US economy and world financial markets" with the deadline now looming large.

City Index analyst Joshua Raymond said investors felt that a deal would be done.

"Time is running out for there to be a deal ... but one gets the feeling that investors still think that deal will come, or we would have likely seen a much more severe reaction in the financial markets," he said.

In midday trading, the Dow Jones Industrial Average dropped 0.44 per cent to 12,625.23.

The broader S&P 500 fell 0.33 per cent to 1,340.62 while the tech-heavy Nasdaq Composite shed 0.24 per cent to stand at 2,852.00.

US default concerns also sent Asian equities lower, with Hong Kong losing 0.68 per cent, Tokyo down 0.81 per cent and Sydney shedding 1.58 per cent.

And Shanghai slumped 2.96 per cent in its worst single-day percentage fall since January 17, after a fatal high-speed train crash prompted a sell-off in rail firms.