The investigation began before Standard & Poor's cut the United States' AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency's secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

During the boom years, S&P and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

Since the crisis, the agencies' business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits. The Securities and Exchange Commission has also been investigating possible wrongdoing at S&P, according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody's and Fitch Ratings.

The background to the meeting was last week's tumult in the world financial markets. Shares had gone into freefall after the downgrading of America's credit rating. Worse than that, however, were the tremors rattling some of Europe's most important banks, notably in France, caused by further evidence of the utter failure of even the more developed European economies to live anything like within their means.

Instead, there was forceful talk of Eurozone countries being coerced into balancing their budgets and reducing their debt through what Merkel and Sarkozy called a 'true European economic government movement' made up of all the heads of state and led, initially, by the EU President Herman Van Rompuy. Although she will not yet admit it, THIS ALL SUGGESTS THE FIRST STEP HAS BEEN TAKEN TOWARDS A FISCAL UNION that will leave Germany dictating the financial terms for the rest of Europe.

BE IN NO DOUBT WHAT FISCAL UNION MEANS: it is one economic policy, one taxation system, one social security system, one debt, one economy, one finance minister. And all of the above would be German. Where Hitler failed by military means to conquer Europe, modern Germans are succeeding through trade and financial discipline. Welcome to the Fourth Reich.

If Germany is to continue to prosper, Europe must prosper: but A RUTHLESS SOLUTION MAY HAVE TO BE IMPOSED in order for that to happen. If the European project is to continue, Germany will not merely have to underwrite it, but control it.

Germany and France have launched a dramatic euro power grab, demanding the right to dictate economic policy to other countries in the single currency. France's Nicolas Sarkozy announced - at a Paris summit with Germany's Angela Merkel - that the two most powerful nations in the eurozone had agreed on a 'true European economic government' to deal with the debt crisis.

The 17 countries in the single currency will be ordered to balance their budgets by 2012 and will have their economic policies overseen by a new eurozone body. EU president Herman Van Rompuy will lead the new body, which will meet twice a year to dictate tax and spending policies. In what amounts to a major step toward a European superstate, France and Germany announced they will adopt a common corporate tax system by 2013, in an effort to signal they are 'marching in step' to protect the euro.

And they will draw up plans for a financial transaction tax, which will cost the City of London billions a year if it is extended to the UK. The plans were a dramatic bid to reassure the markets that EU leaders are serious about saving the euro from collapse. Chancellor George Osborne, who has been calling for bankrupt countries to cut spending, gave a cautious welcome. Senior Treasury officials said they regarded further integration as 'the only way to stop the euro from failing'.

They pledged to use the reorganisation as a chance to negotiate a better deal for Britain in Europe but vowed that the UK would refuse to join a system in which the EU dictated economic policy.

Growth in both Germany and The Netherlands fell to 0.1 per cent in the second quarter as exports faltered. France reported earlier this week that growth in its economy had sputtered out altogether. German Chancellor Angela Merkel insisted the economy was doing fine and needs no extra support. "I think we're on the right track," she said.

THE SUDDEN DOWNTURN REPLICATES THE PATTERN SEEN BEFORE THE LEHMAN BROTHERS CRISIS IN 2008 and threatens to play havoc with the debt dynamics of vulnerable countries. It also marks ominous new turn in the eurozone crisis. Europe's survey data point to a manufacturing contraction over the early autumn, making it even harder for the struggling debtors of southern Europe to claw their way back to viability. The two fear gauges in the credit markets - the iTraxx Crossover index and the Euribor/OIS spread - are both issuing warning signals.

"WE HAVE REACHED THE TIPPING POINT," said Andrew Robert, credit strategist at RBS. "All the props have been knocked away from global growth, the eurozone and Europe's banking system. The risk of global recession is far higher than markets are discounting." The grim data came as Chancellor Merkel and French President Nicolas Sarkozy emerged empty-handed from their Paris summit, offering nothing concrete to restore crumbling confidence in the eurozone project.

The two leaders ruled out eurobonds and refused to boost the firepower of the eurozone bail-out fund beyond 440 billion euros (386 billion pounds). Mr Sarkozy said EUROBONDS could be "imagined one day" but have no democratic legitimacy at this stage and WOULD NOT WORK WITHOUT MUCH DEEPER EMU INTEGRATION. "Today's meeting produced nothing," said Kathleen Brooks from Forex.com. "The markets are likely to be highly underwhelmed. The only thing we do know is that Sarkozy and Merkel aren't willing to ditch the eurozone and let the peripheral nations drown just yet."

SPIEGEL: You recently said that it would be a "catastrophe" if an American rating agency downgraded the United States' credit rating. Now that Standard and Poor's has taken that step, is the situation as bad as you imagined?

Guan: This rating on the US credit crisis has a significant influence on the world. China is the largest debt holder of the United States, and the downgrade will primarily damage the value of the US dollar assets and bonds held by China. Second, it will influence China's export of commodities to the United States in the future. More importantly, it will lead to the deterioration of global macroeconomics for both developed debtor economies and emerging creditors.

SPIEGEL: Will China invest less in US bonds from now on?

Guan: I personally think it's unsafe to invest in US bonds. It is too risky. But the Chinese government might have considerations other than just economic risk. In terms of pure investment, however, it is not a wise decision any longer.

SPIEGEL: Both the US and Europe are struggling with a massive debt crisis. Is this the end of Western dominance?

Guan: The EU and the United States both have this model of borrowing money to boost their economic development. But they borrow money from the future, they mortgage a virtual fortune that they may - or may not - earn for their creditworthiness and their current consumption. This has been their model since World War II, but this model ended in the financial crisis of 2008. Continuously creating demand for credit to enlarge capital and cash flow has used up their creditworthiness. This means the model of economic development in developed Western capitalist countries has ended. It leads to another question: Should the government keep borrowing money to support its citizens in consuming much more and maintain high social standards? I think the answer is no.

SPIEGEL: Your agency downgraded the United States before Standard and Poor's did so. Why?

Guan: We use a different rating system. When we evaluate sovereign creditworthiness for the United States, we consider the potential outlook of its economic development - the driving force to boost its economy - along with its revenue and expenditures. The US has poor performance in all three criteria. Besides, it needs to borrow a lot of money to keep running the country, and without improving the above three criteria, its ability to repay debts will worsen further.

SPIEGEL: Were American rating agencies unable to look at the situation from the same sober perspective?

Guan: My major criticism is that they do not evaluate and rate a country according to what actually causes risks to creditworthiness. Instead, they use ideology and values. If we keep using this rating system, the whole world will be in great danger.

The franc's rapid rise has prompted squeals from Swiss businesses and exporters, who see their margins dwindling, raising the pressure on Swiss officials to take decisive action. As part of the new measures, the government will exempt small and medium-sized companies and hotels from social security contributions, the TagesAnzeiger newspaper reported, citing sources close to the Swiss cabinet.

The social security reductions, which could reduce the burden on companies by up to 1.3 billion Swiss francs, will be limited for one year, the paper said. In addition, Economy Minister Joseph Schneider-Ammann plans to support the tourism industry and the commission for technology and innovation with 100 million francs each.

The measures outlined by the newspaper are similar to measures announced by the government earlier this year. The government in July rejected the idea of capital controls. Speculation has also been rife that the Swiss National Bank, which is in talks with the Swiss government, could set a lower limit for the euro-Swiss franc exchange rate on Wednesday.

($1 = 0.791 Swiss Francs)

Electronics stocks were weak across Asia after computer maker Dell slashed its 2012 sales forecast late on Tuesday, a deeply bearish signal not only for the shaky state of global demand but for other hi-tech manufacturers, many of which are listed in Tokyo, Seoul and Taipei. Roland Randall, senior strategist at TD Securities in Singapore said global markets were at the moment largely driven by fundamentals, but still expected more policy initiatives after the inconclusive Franco-German summit.

"This is not panicking any more, it's just investors being disappointed relative to expectations on these two fronts, economic activity and evidence of central banks' and politicians' efforts," he said. A hotly anticipated meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Tuesday fell short of producing a plan of dramatic action to tackle the euro zone's debt crisis, an outcome many market watchers had anticipated.

While long-term deficit reduction has become a pressing problem for many developed economies, many investors fear that calls for immediate spending cuts in many euro zone countries and the United States could retard global growth further. Gold, attractive to some investors as a refuge from turmoil in currencies, bonds and shares, is one of the best-performing assets this year. It traded at $1,784.44 per ounce on Wednesday, little changed from the previous session around $30 below the peak it touched last week. US crude oil futures rebounded 62 cents to $87.10 per barrel after sliding on Tuesday on worries that flagging global growth will dampen energy demand.

The prescriptions awaiting Biden, who arrives in Beijing later Wednesday, range from cutting government budget deficits to fighting poverty. While similar to the advice of Western analysts, the comments are unusually pointed for China where communist leaders say governments should stay out of each others' affairs, and show the shifting fortunes of the two powers. "The United States has entered a long period of decline," wrote economist Xia Bin, who advises China's Cabinet and central bank, on his blog.

"Later this morning, we're going have a press conference with Secretary Mavis and Secretary Chu to announce something that's never happened in this country - something that we think is exciting in terms of job growth. I should point out, when you talk about the SNAP program or the foot stamp program, you have to recognize that it's also an economic stimulus."

"Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It's the most direct stimulus you can get in the economy during these tough times."

Liberal Democrat MP Tom Brake said sentences "should be about restorative justice" not retribution. But Conservative MP Gavin Barwell said tougher sentences sent a clear message that disorder would not be tolerated. More than 2,770 people have been arrested in connection with last week's riots in a number of English cities. By Tuesday afternoon, 1,277 suspects had appeared in court and 64% had been remanded in custody. In 2010 the remand rate at magistrates for serious offences was 10%.

The courts and tribunals service says legal advisers in court have been advising magistrates to "consider whether their powers of punishment are sufficient in dealing with some cases arising from the recent disorder". Magistrates are able to refer cases to crown courts which have tougher sentencing powers. Meanwhile, in the Guardian, Justice policy director Sally Ireland also expressed the view that some sentences were out of all proportion with the crimes committed. She said there would be a flurry of appeals "although by the time they have been heard, those sentences may already have been served".

However, Mr Barwell, whose constituency in Croydon, London, saw some of the worst rioting last Monday night, said the type of sentences being handed down would be welcomed by many. He said there was "a virtual unanimity" among his constituents that people wanted to see the courts get tough with the people that "caused the terrible criminality" in Croydon. Tougher sentences would help restore confidence in the justice system and send out "a very clear message to people that this kind of disorder is not going to be tolerated", he said.

Ms Merkel said that further integration would be a "step-by-step" process. They also advocated a tax on financial transactions to raise more revenues.

The two leaders said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council. Markets reacted negatively to the conference, with some investors saying that they were expecting bigger announcements.

In New York, the Dow Jones Industrial Average fell 1.3% during and after the press conference, which took place after the close of trading in Europe, but recovered later. Government bonds in the US and Germany - seen as safe havens in any economic downturn - rallied in reaction to the leaders' comments. Ms Merkel again played down the chances of introducing "eurobonds" - jointly guaranteed debts of the 17 eurozone governments - as a solution to the crisis.

The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order. But the German chancellor said she only saw such a move coming at the end of a long process of fiscal union. Earlier on Tuesday, Germany revealed that its economy grew by just 0.1% in the three months to June, much more weakly than previously thought. Germany had been driving the economic recovery in the eurozone.

"We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schaffler, the finance spokesman for the Free Democrats (FDP).

Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future."

Alexander Dobrindt, general-secretary of Bavaria's Social Christians (CSU) and a key Merkel ally, said his party has issued a "crystal clear 'No' to eurobonds". Chancellor Merkel also faces mutinous grumbling among her own Christian Democrats (CDU), though the party's policy elite is willing to consider partial eurobonds up to the Maastricht limit of 60 per cent of GDP but only under stringent conditions.

It is clear the German public is in no mood for any such formula. A YouGov poll shows 59 per cent of Germans oppose all further bail-outs. The majority want to see Greece expelled from the euro and 44 per cent want Germany to withdraw from EMU. "Given the rising euroscepticism in the population, it is too politically dangerous to toy with the explosive subject of eurobonds," said Hamburger Abendblatt.

At the other end of the country, villagers in Dorset say water levels on their rivers and streams are among the lowest in living memory. And stretches of the River Kennet at Denford near Hungerford, Berkshire, have virtually dried up. The River Teme crisis is on the section between Knighton and Leintwardine, near Ludlow. Pictures have appeared on Twitter showing sheep being able to cross the river because it's so shallow.

According to official figures on the Environment Agency website, water levels are now below the expected depth for the river at Leintwardine and Tenbury Wells and only just at acceptable levels in Knighton and Ludlow. Agency spokeswoman Jessica Campbell said "We have carried out a fish rescue operation because water levels are continuing to fall. The species of fish we have rescued include brown trout, minnows, bullheads and young salmon - obviously it is very important in the case of the salmon as they are juvenile fish."

All that can be seen where ducks used to swim in Burton Pond are sad-looking cracked mudflats. Even recent heavy rainfall has failed to raise the rivers to more than a muddy trickle. Over recent weeks, it's got so bad that local people have set up dams to create pools after finding fish gasping for oxygen. Ducks have been seen fighting over precious patches of water along the once fast-flowing streams. Local resident Adrienne Howell, who has lived in Mere for almost 70 years, says she cannot remember seeing the streams in such a sorry state and a mill pond in Burton is completely dry.

They are gamblers in the service of the state. Their open-plan office is similar to that of an investment bank: The telephones have a direct line to the financial centers, and monitors flicker with columns of numbers. Specialists at the Agence France Tresor, as the treasury in Paris' Rue de Bercy is called, manage the French government's assets and liabilities, "in the best interest of the taxpayers."

There is growing concern not just in the treasury, but in the whole of France, about the solidity of the country's finances. Since doubts about France's creditworthiness surfaced in financial markets, the "historic earthquake," as French daily Le Point has called the euro debt crisis, has also engulfed Paris. Speculation that France might be facing a downgrading of its top AAA rating has shaken the trust of investors, and rumors about a possible bank bankruptcy have caused deep plunges in French share prices.

Ever telegenic and prepared to offer up a soundbite, President Nicolas Sarkozy broke off his summer vacation and rushed back to the Elysee Palace to lead a crisis meeting on August 10 attended by ministers and the head of the French central bank. It had been intended to calm markets, but it achieved the exact opposite.

There is nothing new about doubts over France's willingness to implement tough savings, and the Organization for Economic Cooperation and Development and the International Monetary Fund have repeatedly warned that the country needs to take extra steps to reduce its deficit. Despite pithy political rhetoric, nothing has changed in terms of France's structural problems: weak economic growth, a chronically negative trade balance and a creeping loss of competitiveness.

The man who will decide on the financial health of entire countries this summer wears dark suits and square wire-rimmed glasses. He has graying hair, but his face is youthful. He speaks in a sonorous baritone tinged with a southern German accent. Yes, this ratings guru is from Germany. His name is Moritz Kraemer and he makes a friendly and relaxed impression. But when his critics talk about Kraemer's work, they characterize him as "highly dangerous" and a "firebrand," one of those murderous men "who destabilize all of Europe." His powerful opponents include the German chancellor, the president of the European Commission and the French head of state, to name just a few.

Kraemer is the head of the European sovereign credit ratings unit at Standard & Poor's. Together with his colleagues at the rating agency, he has helped ensure that Greek government bonds are now seen as "junk" and those from Portugal and Ireland are rated only slightly better. Being saddled with such a low rating makes it far more difficult for these countries to take out additional loans.

Kraemer and his team have repeatedly downgraded Greece's credit rating over the past two years - and each step down the rating ladder has escalated the European debt crisis. "That was really rough," Kraemer admits in a surprisingly calm manner, "but we're simply obligated to promptly inform investors of our opinion of the risks involved." Kraemer assesses the creditworthiness of countries and addresses the question of how likely it is that they will become insolvent. Working with his colleagues, he takes hundreds of pieces of data, combines this with people's views and opinions, and finally distills this to a rating. The highest rating, AAA, has become the ultimate seal of approval. From there it goes downhill over nearly two dozen rungs to D, for default. Germany is rated AAA. Greece is hovering just above D.