- December 2, 2010
USA gets downgraded again
Chinese credit rating agency Dagong Global Credit Rating is back in the news again after having downgraded American sovereign debt earlier in November from AA with a negative outlook to A+ with a negative outlook.
In their rating report, Dagong highlighted 5 points (some of which when read literally paint quite a chilling picture of US debt) to justify their action including:
The U.S. government has not introspected on the question of the development and management model of the national economy from the global strategic perspective, which makes it very difficult for the U.S. to fundamentally change the passive situation of economic development.
- Subject to the economic development model of the United States, the credit crisis is far from over, and the U.S. economy will be in a long-term recession.
- Continuous economic downturn leads to increasing risks in the financial system and the trend of the U.S. dollar depreciation will cripple the value transfer capability of the financial system to attract dollar capital reflow.
- New round of liquidity injection can not substantially reverse the trend of increasing the federal government’s fiscal deficit and debt burden in the long term.
- In essence the depreciation of the U.S. dollar adopted by the U.S. government indicates that its solvency is on the brink of collapse, therefore it wants to cut its debt through the act of devaluation with the national will; such a move has severely harmed the interests of creditors. The whole world, consequently, will have to face a period of dramatic adjustment of interest pattern.
In particular, Dagong expands on their first point saying:
- the credit expansion policy has changed both the economic fundamentals and the operating mechanism of the U.S. economy.
- the economic financilization and industrial hollowing-out in the United States has broken the normal relationship between the financial system and real economy, leading to the pursuit of the virtual wealth.
- the U.S. global hegemonic strategy has consumed enormous national financial resources, but its own capacity of wealth production is insufficient to support its huge strategic target.
- long-term dependence on the U.S. dollar depreciation to export debt is not only harmful to the creditor’s interests, but is also unable to solve its debt dilemma.
- the reform of financial and rating systems has failed to fully reflect the essential requirements of the credit economy, and it is difficult to establish a basic service system of national economy that accommodates the development law of a credit economy, so as to push the U.S. economy into a path of revival.
Much like the first time, politics is playing a central part in the many explanations about the recent announcement with critics calling the downgrade yet another result of the SEC’s rejection of Dagong’s application for official NRSRO (credit rating agency) status in America earlier in the year. Politics aside, what seems to be evident is that Chinese firms, much like the government, are more willing to make their differing opinions and analysis heard around the world regardless of industry or sector – and foreign media, analysts and politicians are actually paying attention to it more closely even if they are somewhat dismissive towards contrary opinions. (Had a similar event occurred years ago, it is very likely that not nearly as many people would have cared or paid attention to it)
So who is right (if anyone)? Moody’s, S&P and Fitch which all award the US an AAA or Dagong? While no one can say for sure, it is very likely that China itself, as one of the largest holders of US Treasuries, would rather prefer see a long-term outcome playing out according to the way the Big 3 see and rate it rather than the unnerving perspective painted by Dagong. While fierce competitors on one hand, both countries very well likely depend on the continued success and growth of each other for their own mutual benefit.