Dagong Global Credit Rating, China’s leading credit ratings agency, has downgraded the American sovereign credit rating to A.
America’s local and foreign currency credit rating as is now at A+, down from AA in June. Dagong has assigned a negative outlook for both.
The downgrade by Dagong reflects America’s “deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment”.
The report outlines “serious defects” in America’s economic development and management model
The report outlines “serious defects” in America’s economic development and management model. This, Dagong argues, will lead to a long-term recession of its national economy which will fundamentally lower the national solvency.
In addition, it warns that the second round of quantitative easing may lead to a depreciation of the dollar which could continue and deepen the credit crisis.
“Such a move entirely encroaches on the interests of the creditors, indicating the decline of the US government’s intention of debt repayment,” the report says.
“Analysis shows that the crisis confronting the US cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the US government’s policy to continuously depreciate the US dollar against the will of creditors.” (article continues below)
Dagong criticises America’s policies and measures introduced to recover its economy. It also blames the “long-standing accumulation of the contradiction in its economic system” for the occurrence and development process of America’s credit crisis.
The ratings agency says this debt burden can be relieved only to a certain extent through large-scale printing and issuance of dollars.
“The consequent decline of the US dollar status and national credit will block the debt revenue channel which is vital to the existence of the United States to a greater extent,” the report says.
“The potential overall crisis in the world resulting from the US dollar depreciation will increase the uncertainty of the US economic recovery.”
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, 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 like 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 fund to avoid a bailout, is rated AA-.