Tuesday, August 2, 2011

China Rating Agency Downgrades US Debt

Interesting to see a Chinese Rating Agency downgrade the US sovereign debt rating when the US rating agencies have been unwilling or unable to make such a move. Its clear that the US doesn't deserve the highest credit rating with $14T of debt growing at an alarming rate. Not to mention a government unwilling to make the tough spending cuts.

The Dagong Global Credit Rating agency (never hear of them) cut the credit rating to A from A+. Not even sure from the report whether the highest rating for them is AAA as well. Assuming so they had already downgraded the US several levels prior to this move.

What is ironic is that Franklin Templeton complained about the Chinese rating agency lacking transparency. Really? What about lack of accuracy by the big three firms - Moody's, S & P, and Fitch? Not sure why the obsession still exists with agencies proven to lack independence.

Another interesting point is that China is the largest holder of US Treasuries. Downgrades of US debt could make those holdings worth a lot less if rates were forced up. Though the 'Too Big Too Fail' theme appears to help the US out of this situation. Anybody holding Greece or Italy debt can flee those markets limiting buyers and causing rates too soar. A lot of investors have few incentives too ensure that Greece survives while the US is so large and players like China have no other options. Hence, China can't afford to abandon the US debt markets and rates will remain low regardless of rating downgrades.

The move has limited impact, but does highlight how logical rating firms should react:


  • China's Dagong Global Credit Rating has cut its credit rating on U.S. sovereign debt to A from A+, Chen Jialin, general manager of the international department at the firm confirmed to CNBC on Wednesday.
  • According to Xinhua, Dagong's decision was based on "the fact that the U.S. national debt growth had outpaced economic growth and fiscal revenue, hurting the country's debt-paying ability."
  • Franklin Templeton, one of the world's biggest fixed income managers, also said Dagong's ratings lacked transparency.
  • Hasenstab, however, said Dagong's action raised an important issue that politicians had been unable to deal decisively with the debt issue and the bruising political fight had hurt confidence in the U.S.

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