World economic grouping OECD said on Monday the global economy had come out of free fall, offering hope of incipient recovery late this year to investors and markets unnerved by rising U.S. government debt.

The U.S. dollar fell to a 2009 low as fears grew the United States could find itself at risk of being stripped of its triple-A rating, a move that would have wide implications for global investment already throttled by the crisis. Ratings agency S&P stirred concern on Thursday by suggesting Britain could face such a downgrading.

Organization for Economic Cooperation and Development (OECD) head Angel Gurria, clearly moving to dispel fears around investment ratings, told a Madrid conference: A rating cut of the United Kingdom would be inexplicable.

He acknowledged there was a risk the crisis, which began last year with a collapse in the U.S. housing market and is now hitting trade and industry throughout the world, could yet be prolonged without fiscal and credit discipline.

The rate of the slowdown is easing; we're no longer in a free fall, Gurria said. The (stimulus) packages in Europe aren't as big as in the United States, which is why the States is recovering quicker and the crisis is closer to its end.

Asked if world output could begin to recover by year end Gurria said: I would say yes, the issue of recovery does not mean that we start to have very clear positive figures but that first the world economy stops contracting.


The scale of U.S. stimulus packages and government debt, however, is causing concern on markets.

Bill Gross, manager of the world's biggest bond fund, warned the United States will eventually lose its top AAA credit rating, a fear already haunting markets and keeping dollar, stocks and bonds under selling pressure.

The United States will face a downgrade in at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today, Gross, co-chief investment officer of Pacific Investment Management Co, told Reuters.

Standard & Poor's on Thursday lowered its outlook on Britain to negative from stable, threatening its top AAA rating. Britain faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product.

Stung by the S&P report, the three main U.S. stock indexes closed down more than 1.5 percent on Thursday. On Friday morning the FTSEEurofirst index <.FTEU3> was little changed.

Britain suffered more bad news on Friday, when an official report showed its Gross Domestic Product shrinking 1.9 percent, its sharpest quarterly rate since 1979, in the first three months of the year. The figures served only to underline the acknowledged weakness of the economy and had little market impact.


The global economic crisis continued to make itself felt on the corporate front with British Airways , Europe's third-biggest airline, slumping to record losses, cancelling its dividend and nearly doubling its debt.

U.S. Treasury Secretary Timothy Geithner also sounded alarms on the burgeoning budget deficit.

We must get our fiscal house in order or risk having government borrowing crowd out productive private investment, said Geithner in testimony before a congressional panel on Thursday. He said the administration has to make sure its policies help retain confidence in the dollar's value.

My basic obligation is to make sure we put in place policies that sustain confidence in this economy, in our currency, that we sustain a strong dollar, Geithner said.

Japan signaled cautious optimism about prospects for the world's second biggest economy on Friday.

The Bank of Japan upgraded its view on the ailing economy for the first time in almost three years while keeping interest rates on hold, noting that steep declines in exports and output were leveling out.

The pace of deterioration in the Japanese economy will likely moderate and the economy will likely stop deteriorating, the central bank said in a statement. Financial conditions remain severe, although tensions have eased.

Philadelphia Federal Reserve President Charles Plosser warned in a speech on Thursday that the U.S. government's emergency programs for the economy undermined central bank independence and raised the risk of inflation.

When a nation's treasury or finance ministry and its central bank work too closely together, there is a clear risk that the government's spending will end up being financed by the central bank's power to create money, Plosser said.

History shows us that you can get very bad economic outcomes with rapidly rising inflation.

(Reporting by Reuters correspondents worldwide; writing by Ralph Boulton; editing by Andrew Roche)