Chinese ratings agency threatens US with new debt downgrade

China's biggest ratings agency is warning that it may be downgrading the US's debt rating again because of the failure of Washington to address the budget deficit. Last year the ratings agency lowered its rating from AA to A+.

Peter Beaumont
Friday 11 November 2011
The Guardian

The head of China's biggest ratings agency, Dagong Global Credit Rating, is warning that it may downgrade the US's sovereign debt rating again because of Washington's failure to tackle the federal budget deficit.

The remarks by Dagong's chairman, Guan Jianzhong, to be broadcast in an interview with al-Jazeera on Saturday morning, come at the end of another week of deep turmoil for the world economy.

Dagong, which has maintained a pessimistic outlook on US fiscal policy, has been leading the charge to downgrade US debt over the last 12 months, lowering the US rating from AA to A+ a year ago.

In August it downgraded US debt again, to A. Days later, Standard & Poor's followed in its wake, becoming the first western agency to downgrade US debt after the threat of a default was narrowly avoided following weeks of political squabbling in Washington over whether President Obama should be allowed to raise the US debt ceiling.

Guan's intervention comes as another embarrassing political standoff over budget policy looms in Washington. The cross-party "supercommittee" given the job of finding ways to cut the budget deficit is reportedly deadlocked, with Republicans refusing to countenance the tax rises being suggested by Democrats. The committee is due to report by 23 November, but there are fears they could fail to reach agreement, prompting a new crisis.

Founded in 1994 by the Chinese government and the People's Bank of China, Dagong is the only credit ratings agency in China that grades foreign sovereign debt and bonds.

In an interview with Talk to Al-Jazeera, Guan agrees that it is almost inevitable that his agency will cut America's debt rating once again, arguing that the only solution open to the US economy is further quantitative easing.

"The measures available to them [the US] cannot be effective so they have another way out which is to depreciate the US dollar, to print more money," he says. "And that will also make it a lot worse, this has affected their credit and it is negatively affecting their credit prospects – so that their overall ability to pay back their debt will continue to go down.

Asked directly if he believed another ratings cut was inevitable, Guan replies: "I think so."

He goes on to say: "We are continuing to monitor this closely. First of all we need to look at this year's economic growth and then predict next year's trends. If in the year 2012 the overall projections are not very good, meaning that the sources of payment – and liabilities – are bad and cannot be changed, or change for the worse, then we will lower the rating once again.

Any further downgrading of the US credit rating, while making more US borrowing more expensive, would also be a matter of concern to Beijing.

China is the largest foreign buyer of US government debt – accounting for around third of all foreign-held US securities – despite the fact it has gradually reduced its holdings since the S&P downgrade and has also lost heavily on its large holdings of US currency.

Since the summer – and the debt-ceiling crisis – China has become ever more vocal about what it describes as the US "addiction" to debt, warning in August that more "devastating credit rating cuts" and global economic turmoil were around the corner unless Washington learned to live within its means.

The Xinhua news agency issued a commentary that cautioned: "The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone."

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