Chinese downgrade for American treasuries

Dagong Global Credit Rating, a Chinese credit ratings agency, has downgraded American sovereign credit to A.

America’s local and foreign currency credit rating is at A+, down from AA in June. The negative outlook for both reflects America’s “deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment”, the agency says.

Its report outlines “serious defects” in America’s economic development and management model. This, Dagong argues, will lead to a long-term recession in its economy that will fundamentally lower its solvency. America’s second round of quantitative easing may lead to a depreciation of the dollar, which could continue and deepen the credit crisis, the report says. (article continues below)

Dagong criticises America’s policies and measures it has introduced to promote economic recovery. It blames the “long-standing accumulation of the contradiction in its economic system” for America’s credit crisis. The country’s debt burden can be relieved only to a limited extent through large-scale printing and issuance of dollars, it says.

China remains the largest holder of American debt and has an interest in persuading the American government to reduce its debt burden.

But according to Jerome Booth, the head of research at Ashmore, emerging markets are also suffering financially from the methods of developed world ratings agencies. Under the developed world ratings system, Booth points out, an emerging market such as Brazil, with its highly stable macroeconomic regime, is rated a BBB-. In the developed world, however, Ireland, which is spending its reserves and sovereign wealth to avoid a bail-out, is rated AA-.