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US credit rating downgraded
Aug 3rd 2011, 9:04 by Buttonwood
THE Western ratings agencies may not have downgraded the US yet but that hasn't stopped Dagong, China's rating agency, from doing the deed. The agency already rated the US as less than AAA. But today, it has pushed the rating down from A+ to A, and placed the rating on negative watch (indicating the potential for a further cut).
The agency, which seems to have some shaky translation software, cites four reasons for the decision on its website. First:
at this crucial juncture, neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest; they had a hard time making the correct choice in a timely manner leaving the world in terror, which highlights the negative role of the US political system on an economic basis. This incident will definitely exert its continuous impact on investors’ confidence in US Treasury bonds, affecting the stability of the US debt income.
Second,
the fact that the US Congress approves the raising of the debt limit further indicates that the multiple factors affecting the national debt service capability will not change positively in a considerable long term, and that no substantial change will occur to the severe imbalance between the real wealth creation capability and huge national consumption.
Third,
The pace of the US deficit cut is far lower than that of new debt growth and the fiscal policy of revenues falling short of expenditures will surely keep pushing the US government debt to a higher level. Dagong predicts that the deficit level of the US government will remain moderately high in the future and the size of federal debt will exceed the GDP by the end of 2012.
Finally, Dagong says that
the US Congress has not come up with a positive resolution on how to address the problem of insufficient driving forces for national economic growth, which indicates that the US government cannot resolve the fundamental influence of low economic growth, high deficit and increasingly higher debt to the debt service capability through increasing real wealth creation, with the declining national solvency irreversible. It is natural that QE3 monetary policy will be enabled for the next step, which will throw the world economy into an overall crisis; the status of US dollar will be essentially shaken in this process.
Of course, there is a certain amount of political posturing and wish fulfilment in these opinions. Nevertheless, China does own a lot of Treasury bonds so its opinion does matter. And other big investors are critical too, notably Bill Gross of Pimco who says that
even though the US has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet A for budgetary abuse that will not disappear.
