S&P Dithers While Dagong Global Cuts US Credit Rating, Again

While two of the US’ most important credit rating agencies — Moody’s and Fitch — have maintained the US’ triple-A rating, Standard & Poor’s has yet to announce where it stands. That’s after already stating a 50 percent likelihood of downgrade if Congress failed to cut spending by at least $4 trillion over 10 years.

Congress “cut”… using the term loosely… about $1 trillion over ten years and has only tenuous plans to “cut’ another $1.5 trillion through its newly-developed Super Congress. A far cry from the $4 trillion recommendation.

On the other hand, 17-year-old Dagong Credit Rating Co. — based in Beijing — hardly skipped a beat. What China’s leading credit rating agency lacks in international influence it makes up for in gusto and pummeling downgrades. According to Dagong, the US was already on negative outlook last month and, as of this past Wednesday, it has downgraded US sovereign debt from A+ to A… and still with a negative outlook to boot.

According to CNN:

“The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy, announced a further downgrade to A, indicating heightened doubts over Washington’s long-term ability to repay its debts.

“It said the gloomy assessment — much lower than the AAA ratings given by the so-called ‘big three’ Western agencies Moody’s, Fitch, and Standard and Poor’s — was inevitable given the level of market concern generated by the stalemate between Democrats and Republicans over the debt ceiling.

“‘The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,’ Dagong Chairman Guan Jianzhong told CNN. ‘The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,’ he said…

“‘…Our downgrade simply reflects reality,’ Guan said. ‘Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.'”

Partly because Dagong is still not a Nationally Recognized Statistical Rating Organization (NRSRO), its downgrade is unlikely to have any impact on the bond markets. That said, it’s a good thing for the US that China’s State Administration of Foreign Exchange (SAFE) — which holds about $1.2 trillion in US debt — isn’t required to only invest in sovereign debt considered “safe” by its own hometown credit rating agency. The Chinese downgrade really wouldn’t seem so trivial then.

You can read more details in a CNN article on China’s Dagong Global rating agency downgrading US debt.


Rocky Vega,
The Daily Reckoning