Well, this was bound to happen.
Dagong Global Credit Rating Co. — the Chinese rating agency which hit headlines earlier this year for its AA-view on the United States — is back. With a US downgrade.
From the just-published, 10-page report:
Dagong has downgraded the local and foreign currency long term sovereign credit rating of the United States of America (hereinafter referred to as “United States” ) from “AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment.
The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency. The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar, and the continuation and deepening of credit crisis in the U.S. Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment. Analysis shows that the crisis confronting the U.S. cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the U.S. government’s policy to continuously depreciate the U.S. dollar against the will of creditors.
The rating bases for downgrading the sovereign credit rating of the United States by Dagong are as follows:
I. 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…
II. 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…
III. 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…
IV. 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…
V. 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…
Outlook: Dagong believes that the occurrence and development process of the credit crisis in the U.S. resulted from the long-standing accumulation of the contradictions in its economic system; the U.S. debt burden can be relieved only to a certain extent through large-scale printing and issuance of the U.S. dollar; however the consequent decline of the U.S. 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 potential overall crisis in the world resulting from the U.S. dollar depreciation will increase the uncertainty of the U.S. economic recovery. Under the circumstances that none of the economic factors influencing the U.S. economy has turned better explicitly it is possible that the U.S. will continue to expand the use of its loose monetary policy, damaging the interests the creditors. Therefore, given the current situation, the United States may face much unpredictable risks in solvency in the coming one to two years. Accordingly, Dagong assigns negative outlook on both local and foreign currency sovereign credit ratings of the United States.
For those, umm, wondering — every other major (Western conspiracist) rating agency still has the US at a triple-A, though we haven’t heard much from them in the wake of the Fed’s second round of quantitative easing…
Related links:
Dick Bove on QE2 as a bank-less “financial war with China” - FT Alphaville
Dagong gets defiant - FT Alphaville
S&P to Dagong (and Moody’s): It’s on – FT Alphaville