Ratings agencies have downgraded their views of debt held by American International Group (AIG) Inc, as fears of a meltdown spread through the financial sector.
AIG was trying to raise new finance on Tuesday, a day after it failed to convince Standard and Poor's, Moody's, and Fitch, the three main rating agencies, of its ability to pay its debts.
The move by the ratings agencies left AIG, which has already recieved a $20bn lifeline from New York state, needing to raise more capital to survive.
The Wall Street Journal reported on its website on Tuesday that people close to the situation said AIG might be forced into filing for bankruptcy if it can not secure sufficient fresh funding by Wednesday.
Fears that AIG, once the world's largest insurer by market value, could be the next financial giant to tumble fuelled worries about the potential fallout.
"If AIG tanks, that will be the big one. AIG has more to do with the oil price right now than the Saudis do," said Larry Grace, an energy analyst at Kim Eng Securities in Hong Kong.
Ratings downgraded
The ratings agencies pointed to the US housing crisis - to which AIG is highly exposed - and the substantial fall in the values of its shares as the reasons for their downgrade.
Shares in AIG plunged nearly 61 per cent on Monday and the US Federal Reserve hired Morgan Stanley, an investment bank, to review options for the firm, a person familiar with the situation said.
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"This would have a much bigger impact than a bank going down ... AIG has a much bigger presence globally"
Lorraine Tan, from Standard and Poor's
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AIG has lost 92 per cent of its value this year.
The ratings downgrade could force AIG to post more collateral and nullify insurance contracts, possibly setting in motion a chain reaction that could threaten its survival.
Lorraine Tan, director of research for Asia at Standard and Poor's in Singapore, said: "You don't just have a potential impact on the re-insurer side, you have it on the institutions that might be holding AIG paper.
"This would have a much bigger impact than a bank going down like Lehman [which filed for bankruptcy on Monday] or Bear [Stearns] ... AIG has a much bigger presence globally. Their reach to a global customer base is quite sizable," she said.
Standard and Poor's lowered AIG's rating to A-minus from AA-minus, a three-peg reduction, while Moody's Investors Service cut AIG's rating to A2 from Aa3, a two-notch downgrade. Fitch Ratings reduced its standing to A from AA-minus, a two-notch cut.
AIG's ratings are still investment grade, although all three agencies said more downgrades could follow.