US Debt Rating Downgraded (Sort Of)

Breaking news: As we’ve been forecasting for some time, the US has been stripped of its AAA credit rating. So have Britain, France and Germany…

The great reckoning has begun… Let your crash flag fly!

Wait a second…this one’s a fake.

Like an iPod nano purchased at the Pearl Market in Beijing, this credit rating downgrade will stop working before you even get it home.

When we were in China last month, we had a chance to fire Chinese-made M-16s and AK-47s. The Chinese are reverse-engineering the weapons and mass-producing them. Heck, if the US and Russia are making money in the global arms trade, why shouldn’t China get a piece of the action?

The same logic apparently applies to the global credit markets, too.

This morning, the Dagong Global Credit Rating Co., China’s first real attempt at a ratings agency, initiated coverage on the sovereign debt of 50 different countries.

“Dagong’s sovereign credit ratings are based on the new sovereign credit rating standard created by Dagong,” the Dagong report explains in a perfectly logical, if circular, fashion.

Dagong analysts claim to give a greater value to nations with the best “wealth-creating capacity” and biggest foreign reserves. They strive to “not be affected by ideology,” insisting that “it is the newly-created social wealth that supports the national funding capacity and constitutes the primary source of debt repayment.”

Here’s how global debt looks when expressed in terms of the agencies’ outlook for each of the top 20 countries’ currency.

Dagong Global Sovereign Credit Ratings

Not bad at all. If anything, we note this is yet another subtle shot across the bow from the Far East… they are not nearly as ignorant as most Westerners will them to be.

Who on Earth is going to buy such circular logic and take these ratings seriously? C’mon.

If the Chinese are serious about this game, they should do it the way the SEC does here in the US. Let’s see what real criteria they use to determine if an agency can issue credible credit ratings:

“The single most important factor in the Commission staff’s assessment of Nationally Recognized Statistical Rating Organizations (NRSRO) status,” reads the SEC’s website, “is whether the rating agency is ‘nationally recognized’ in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings.”


“The [SEC] staff also reviews the operational capability and reliability of each rating organization. Included within this assessment are…the rating organization’s independence from the companies it rates…the rating organization’s rating procedures (to determine whether it has systematic procedures designed to produce credible and accurate ratings)…”

Ha! Take that, you Chinese credit raters. The SEC is the decider!

Only 10 organizations in the world are labeled a Nationally Recognized Statistical Rating Organization (NRSRO)! Any worldly company that wants to both utilize a credit ratings agency and comply with US financial regulations has to use one of these NRSROs…thereby making any alternative ratings agencies mostly irrelevant, regardless of the quality of their ratings.

So there.

Of the 10 sanctioned NRSROs, seven are US companies. Naturally. Two are Japanese, and one is Canadian. But we’re pretty sure these last three don’t count. Clearly, no other country in the world is capable of accurately assessing credit conditions.

Sorry, Dagong Global… Wrong country, wrong era. We hear the US Congress is trying to amend this, but you know how that goes.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning