US and EU trading hit by debt worries

Debt worries dominated trading on both sides of the Atlantic today amid fears over America’s failure to set a new ceiling for its borrowings.

US markets were also affected by European debt issues, which knocked the UK’s top four banks despite last week’s European stress tests. Although none of the four UK banks failed the tests, Barclays and Royal Bank of Scotland were the biggest fallers as analysts said the findings were largely irrelevant as they did not take into account the full likelihood of a Greek debt default.

The FTSE 100 Index was down 81.8 points to 5762.6, while European markets were also hit, with the Dax in Germany and the CAC 40 in France both down 1%.

The banking sell-off reflected continued market uncertainty over the threat of contagion from Europe’s sovereign debt crisis and the failure of US politicians to work out a deal to avoid a debt default.

The four UK banks were among 90 tested by the European Banking Authority to assess how their finances could stand up to much lower growth, lower stock markets and higher interest rates. Only eight of the 90 banks tested failed, though a further 16 only scraped through.

Royal Bank of Scotland, which at 6.3% was the nearest of the UK’s banks to the pass mark of 5% for the cushion of core tier one capital, declined nearly 5% or 1.8p to 33.3p.

Barclays, which is believed to have a high level of exposure to the debt-pressured countries on the Iberian peninsula, was also down nearly 4%, or 8p at 215.2p. It held 7.3% tier one capital,