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Credit rating war?

Posted by seumasach on August 3, 2011

New Europe

3rd August, 2011

The United States has narrowly avoided default after both House and Senate passed the bill to approve a last-minute raise of the debt ceiling and President Obama signed it into law, just hours before the deadline.

Nevertheless, China’s leading credit-rating agency the Dagong Global Credit Rating Company, has downgraded US sovereign debt on 3 August after having it on negative watch for a month.

Dagong Global had already lowered the US rating to A+ last November after the Federal Reserve decided to continue loosening its monetary policy. Further downgrade to A, indicates raising doubts over Washington’s long-term ability to repay its debts.

The ‘big three’ Western, or more precisely American, agencies – Moody’s, Fitch, and Standard and Poor’s – maintained the AAA ratings. Chinese agency rendered downgrade inevitable given the level of market concern generated by the stalemate between Democrats and Republicans over the debt ceiling.

“The squabbling between the two political parties…reflected an irreversible trend on the United States’ declining ability to repay its debts,” Dagong Chairman Guan Jianzhong said.

Dagong’s decision to downgrade US sovereign debt move could hurt not just the United States but also China, the largest foreign owner of US debt, worth almost $1.2 trillion.

“Our downgrade simply reflects reality,” Guan said and added that “it was the inappropriately high ratings for the US by Western agencies that had led China to make risky investments in US debt”.

Dagong is a private credit rating agency, founded in 1994 to rate Chinese companies, but in July 2010 it published its first sovereign credit ratings and ranked China higher than the United States and Japan. Dagong now rates 67 countries and aims to expand and become an alternative to the big three. However, the US Securities and Exchange Commission refused to recognise its rating because of the commission’s inability to supervise the Beijing-based agency.

Guan pointed to what he calls Western agencies’ “double standards” in rating the US and European economies to emphasise the global need for competition in this area, too.

And, after concerns were voiced by the European Commission and major leaders in the European Council about the operational practices of the big three, with calls for the creation of a European credit-rating agency, the world may be on a verge of credit rating war.

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