In These New Times

A new paradigm for a post-imperial world

US and UK credit rating downgraded by Chinese

Posted by smeddum on July 18, 2010

Markets fall; Hong Kong shares; stockmarket

But after failure of Western credit rating agencies to foresee financial crisis, has Chinese upstart got a point?

JULY 13, 2010

While the European Union considers regulating the activities of the credit rating agencies Fitch, Moody’s and Standard & Poor’s – and perhaps even setting up a new agency to supplant them – a Chinese body has attempted to revolutionise the whole sector by summarily downgrading the US and Britain.

Dagong International Credit Rating Co, a company that normally rates bonds, has branched out into rating the creditworthiness of nations – and the debt levels of countries such as the US and Britain means they are downgraded below countries such as China, which boasts huge reserves of £2 trillion.

Economic growth rates also carry more weight in the Dagong ratings compared to the US credit rating agencies (CRAs) Fitch, Moody’s and Standard & Poor’s. That means Brazil, for instance, gets an A- ‘stable’ rating – better than the BBB- it gets from the US CRAs.

China gets an upgrade to AA+ – alongside Germany. The US and Britain, which are given AA and AA- respectively for their budget deficit problems are downgraded from the top-rated AAA rating they normally enjoy from Western CRAs. Dagong saves its own AAA rating for the likes of commodity-rich Australia, Norway and New Zealand.

Dagong says it hopes to “break the monopoly” of the big three US CRAs. The company’s chairman, Guan Jianzhong told China Daily the current Western rating system “provides the wrong credit-rating information” and fails to reflect changing conditions.

There has been criticism of the way Dagong has rated countries. The Daily Telegraph questions the use of past growth figures to extrapolate future growth potential – and also highlights how Western CRAs “put a high value on a long-established rule of law and government institutions that have proved resilient over many decades”.

But given the abject failure of US CRAs, which gave top credit ratings to the sub-prime mortgage derivatives that caused the financial crisis in 2007, Dagong may at least get a fair hearing.

One person who will doubtless be sympathetic is the European Commission president Jose Manuel Barroso, who said last month that he was investigating “the need for an independent European credit rating agency” to supplant the big three US CRAs.

“Is it normal to have only three relevant actors on such a sensitive issues where there is a great possibility of conflict of interest?” he said. “Is it normal that all of them come from the same country?”

While the possibility of an EU CRA is still very much up in the air, the EU does plan to regulate the activities of those already in existence. The European Securities and Markets Authority, which will have the power to revoke the licences of CRAs, is expected to be launched in Paris in January 2011. Perhaps Dagong’s bold entry into the sovereign credit rating market will give new impetus to the idea of an EU CRA. 

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