China’s leading debt rating agency Dagong Global Credit Rating Co., Inc. has downgraded its U.S. credit rating.
According to Dagon, despite the US Congress approving the bill to raising the debt ceiling of the government, which enables the government to continue the practice of repaying its old debt through raising new debt, “it has not changed the general trend that the increase in national debt outpaces the increase in economy and revenue, making this incident a turning point for the US government’s solvency to decline even further.”
Dagong said it has decided to downgrade the local and foreign currency credit rating of the US which was put July 14 on the negative watch list from A+ to A with a negative outlook.
The Dagong lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy.
According to Dagong, the defects in the political structure exposed in the bipartisan struggle indicate that the US government has difficulty in ultimately resolving the sovereign debt crisis, adding that “the interest and safety of the US creditors lack a guarantee from the political and economic systems.”
In the opinion of Dagong, “The difference in political views between the Democrats and Republicans has been acting as a curb on the decision-making efficiency of the US government ever since the mid-election in the US. The decision on the debt limit concerns the sustainability of government financing, the safety of the US and world economy, as well as the interest of the Treasury holders.”
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, according to Dagong, “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.”
Dagong sees this having an impact on investors’ confidence in US Treasury bonds, affecting the stability of the US debt income.
Additionally, Dagong said that by raising the debt limit the US temporarily prevents the government from debt default, but it does not improve the national solvency.
Instead, Dagong argues that the heavier debt burden on the government will cause the US sovereign debt crisis to further deepen.
“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. As a result the US solvency will continue a declining trend, and the accumulation of the contradiction between the lowering solvency and the rising debt add to the inevitability of triggering a sovereign debt crisis,” Dagong said.
According to Dagong’s analysis, 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.
“The deficit cut objective approved by the Congress matches the size of raised debt, yet there is an eight-year difference between the two objectives; besides, the deficit cut plan rests on a framework agreement only, lacking credible and feasible policy support,” Dagong said.
Dagong estimates that in order to maintain the current debt size it is necessary for the US to cut its deficit by at least $4 trillion within the next 5 years.
“Obviously the deficit cut program approved by the Congress cannot meet the demand of debt deduction, in addition it reflects a declining willingness of and increasing difficulty for the government in cutting the deficit, which will be unable to provide strong support to the current credit rating,” according to Dagong.
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.
The Chinese rating agency said 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,” according to Dagong.
The radical deterioration in the state management capability, economic strength and fiscal strength that affect the government debt service capability and willingness revealed in the struggle over the debt ceiling determines the outlook of the sovereign credit rating of the US as negative, Dagong said.