Dagong Strikes Again: Cuts UK Debt Rating Once More

Beijing-based Dagong Credit Rating Co. is China’s leading credit rating agency and, despite the limited international influence of its ratings, it keeps pumping out sovereign debt downgrades for the industrialized West.

The latest nation up… or down as the case may be… is the UK. It was already cut from its triple-A standing — as indicated by ratings from US agencies — to AA- in Dagong’s first headline-inducing ratings release. Recently, the UK has again been downgraded, this time to A+ with a negative outlook, due to its deteriorating solvency.

According to the BBC News:

“The agency blamed the UK’s sluggish growth, which it said would be stuck in the 1.3%-1.5% range for two more years, hurting government finances. The downgrade from AA- to A+ puts Britain on a par with Chile and heavily-indebted Belgium, and the US, which Dagong downgraded in November.

“In contrast, the big three Western rating agencies all still award the UK – and the US – the top AAA rating. Dagong kept a negative outlook on the UK’s rating, suggesting that more downgrades may be yet to come. ’Obviously this is not one of the main rating agencies that markets pay close attention to,’ noted Sarah Hewin, European head of economic research at Standard Chartered.

“But she said the comments could still have an impact on market sentiment, just because they are a reminder that all is not well in the UK. ‘Although the fiscal side is being tackled, [Dagong] sees relatively low growth and high inflation,’ she explains.

“The Chinese agency forecast that because of the slow growth, the budget deficit would still overshoot the government’s 7.9% to 9% target, despite George Osborne’s best austerity efforts. It also warned that persistently high inflation could necessitate future rate hikes, increasing the UK’s borrowing costs, while contagion from the eurozone debt crisis was also ‘likely to further worsen the government’s fiscal status’.”

The AFP has also pointed out that the UK deficit is “the third-highest in the European Union after that of Ireland and Greece — higher than either Spain or Portugal, next in line at just above nine percent each.” Yet somehow the UK has managed to stay just outside the intensely-heated debt spotlight that continues to sear the European Union’s periphery GIIPS nations.

Of course, Dagong retains little influence on world markets due to the fact that it’s not one of the Securities and Exchange Commission’s Nationally Recognized Statistical Rating Organizations (NRSRO), of which all 10 remain either North America- or Japan-based. Dagong also readily emphasizes the fiscal health of its own home country, with China rated three notches above both the UK and US, according to its standards.

That said, it’s hardly a surprise that it’s having a tough time getting into the NRSRO club… Dagong’s rating perspectives are more or less the opposite of those held by the currently SEC-approved credit rating agencies.

You can read more details in the BBC News coverage of how the UK sovereign debt credit rating has been downgraded by China’s Dagong.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning