They downgraded US credit from A++ to A on August 2, 2011. On December 25, 2012, they put the sovereign credit ratings of the USA on Negative Watch List. Here is there reasoning. (find the original report here. http://en.dagongcredit.com/Upload/File/201212/6d227041dcad4e40910fb851cb2d7de1.pdf - I repost here because it is slow/difficult at that link.)
Dagong Puts the United States of America’s Credit Ratings on
Negative Watch List
Dagong Global Credit Rating Co., Ltd.
December 25, 2012
Dagong Puts the United States of America’s Credit Ratings on
Negative Watch List Dagong Global Credit
Rating Co., Ltd. December 25, 2012 Dagong Global Credit Rating Co., Ltd.
(hereinafter referred to as “Dagong”) downgraded the local and foreign currency
sovereign credit ratings of the United States
of America (hereinafter referred to as “U.S.”) from A+ to A, and each with a negative outlook on August 2, 2011. According
to the changes in the situation during the
surveillance period, Dagong has decided to put the sovereign credit ratings of
the U.S. on Negative Watch List. The
main reasons are as follows: 1. The
political conflict and the defect in national debt management have pushed the creditworthiness of the federal government to
the cliff again. After the U.S. federal government
debt limit crisis caused by the partisan quarrels in August 2011, it has evolved into the current fiscal cliff and debt
limit crisis due to the same reason. It once
again highlights that the decline of the U.S. federal government’s capacity in interest integration and decision-making is
the political reason of the weakened solvency.
On the problem of how to tackle the national debt crisis, each political party insists on the proposition favorable for
its own interest. Therefore, it is difficult to form a long-term consensus on solving the
debt problem ultimately, which leads to
the unceasingly fiscal deterioration of the government.
2. With no fundamental plan and measures of ameliorating the
solvency in place, the U.S. government
is lacking the willingness of debt repayment, and the depreciation of debt outstanding through debt monetization
has already indicated a trend of implicit
default. Increasing fiscal revenue, cutting fiscal expenditure and reducing the
scale of debt are the ultimate ways to
improve the government indebtedness, but the U.S. government, instead of adopting
effective measures to improve its indebtedness,
came out with two consecutive rounds of Quantitative Easing over the year in order to realize internal circulation
of government debt and sustain its solvency
through monetization. The continuous credit expansion to maintain its consumption through borrowing by taking
advantage of the status of the U.S. dollar without touching on the ultimate issue on
solvency manifests the lack of willingness to repay. The creditors have been
suffering real losses from the consequent persistent devaluation in the debt
outstanding, and the U.S. government has shown a trend of implicit default on its debt.
3. The deterioration in the main factors impacting on the
federal government solvency has further
widened the degree of deviation between the debt repayment sources and the real wealth creation
capability. The wealth creation capability is the ultimate source of debt repayment and the
greater the debt repayment sources deviate
from the wealth creation capability the larger the risks. The debt burden of the federal government increased 9.1% and
11.7% on year-on-year basis in 2011 and 2012
respectively, far exceeding the nominal GDP growth rate of 3.9% and 3.4% as well as fiscal revenue growth rate of 4.9% and
6.2% over the same period. The debt outstanding
of the federal government has risen by 60.7% since the credit crisis in 2008, while the nominal GDP has increased by
only 9.2% and fiscal revenue increased by
7.4% over the same period. By the end of 2012, its debt outstanding is expected
to rise to 104.8% of GDP and 608.7% of
fiscal revenue. The situation exacerbates the reliance of the debt repayment sources on debt
income, and the debt repayment sources
are diverging increasingly further from the wealth creation capability, indicating that the solvency of the federal
government is on a descending trend.
4. As a result of the pending fiscal cliff, the U.S. economy
will probably fall into recession in
2013, and stay weak in the long term, which will further weaken the material basis for the government to repay
debt. The U.S. is facing an unprecedented crisis of excessive credit. The inevitability
and chronicity in the credit bubble burst will directly lead to the continued slump in
total social consumption, triggering a chain
reaction of long-term economic downturn, and the economy may go into a slight recession in 2013 due to the emergence
of fiscal cliff. Consequently the federal government revenue base will fluctuate,
expanding the degree of deviation between debt repayment sources and wealth creation
capability.
5. Debt limit lifting and debt monetization are becoming the
long-term policy of the U.S., and the
real solvency of the government will continue declining. In order to avoid suffering an economic recession resulted
from the abated virtual social consumption
capacity established by the long-standing and excessive credit expansion, the U.S. government has adopted
even greater unconventional credit expansion,
which drags the country into a cycle of continuously lifting the debt limit to
stimulate the economy while sustaining government solvency by excessive issuance of dollar. As the resulting risks of
dollar depreciation keep accumulating, the decline in the government real solvency will
become persistent, and the vulnerable credit
relationships will bear increasing risk of breaking due to the frequent occurrence of emergencies such as the debt
limit.
In summary, Dagong views that as the negative effects from
key factors affecting the U.S. federal
government solvency such as the debt repayment environment, wealth creation capability, debt repayment sources
have been increasing, emergencies such as
fiscal cliff and debt limit will further increase the vulnerability in the
government solvency. Therefore, Dagong
has put the U.S. federal government credit ratings on the negative watch list. Dagong will adjust
the credit ratings according to the real circumstance to reflect the soundness of the
U.S. federal government debt.
