U.S. Debt Downgrade by Chinese Rating Agency Is “Inevitable”

By:  Bob Adelmann
11/15/2011
       
U.S. Debt Downgrade by Chinese Rating Agency Is “Inevitable”

A year ago Dagong Global Credit Rating reduced its rating on the sovereign debt of the United States from AA to A+. In August it dropped it another notch to A. In an interview on Saturday the agency’s chairman, Guan Jianzhong, said it is nearly inevitable that the agency will further reduce its rating of U.S. sovereign debt: "We are continuing to monitor this closely. First of all we need to look at this year’s economic growth [in the US] 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."

A year ago Dagong Global Credit Rating reduced its rating on the sovereign debt of the United States from AA to A+. In August it dropped it another notch to A. In an interview on Saturday the agency’s chairman, Guan Jianzhong, said it is nearly inevitable that the agency will further reduce its rating of U.S. sovereign debt: "We are continuing to monitor this closely. First of all we need to look at this year’s economic growth [in the US] 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."

This would bring the Chinese agency’s rating on U.S. sovereign debt to BBB, “medium high rating” or just one notch above “junk.”

When Standard and Poor’s downgraded its rating on the U.S. sovereign debt from AAA to AA+ back in August, it expressed a dim view of the Budget Control Act that allowed for an increase in the national debt limit while doing little to tackle out-of-control spending: “The fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics." Moreover:

We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount we believe is necessary to stabilize the general government debt burden by the middle of the decade…

As we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program [needed] ... while delegating to the Select Committee [the Supercommittee] decisions on more comprehensive measures.

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