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Thumbs down: Chinese rating agency downgrades US

Published time: October 17, 2013 13:13
Edited time: October 18, 2013 06:33
AFP Photo / Philippe Lopez

AFP Photo / Philippe Lopez

Despite a temporary budget compromise in Washington, China's Dagong agency has downgraded the United States. Dagong maintains a negative outlook on the sovereign credit, as revenue and GDP fail to keep up with the country’s massive debts.

The Beijing-based Dagong agency, one of the few notable non-US based credit rating agencies, has downgraded America to an ‘A -‘rating from ‘A’.

The move came shortly after Congress and President Obama narrowly averted a technical default. Fear the world’s largest economy may default on its widely dispersed Treasury Bonds is making investors re-evaluate political and financial stability in the US.

“The government is still approaching the verge of a default crisis, a situation that cannot be substantially alleviated in the foreseeable future," the Dagong agency said in a press release.

Ratings by Dagong are not internationally recognized, and will likely hold only symbolic, and not market, implications.

According the Chairman of Dagong, Guan Jianzhong, current agencies tend to arbitrarily favor developed economies.

On Tuesday, Fitch Agency put the United States’ Triple A rating under a negative watch. The debt ceiling debacle in 2011 prompted a drop in the superpower’s rating from AAA to AA+.

Standard and Poor’s hasn’t issued a warning or downgrade, but released a statement Wednesday calculating the government shutdown didn’t save, but rather cost the US $24 billion.

"The bottom line is the government shutdown has hurt the US economy," the S&P statement said.

Overrated

Dagong thinks the US government debt, currently $16.7 trillion, and spread domestically and internationally, is rated too high.

  Sixty percent of foreign currency holdings are in dollars, with a total dollar equivalent of $6 trillion.

If the US were to renege on its debt obligations, central banks around the world that hold Treasury Bonds as reserves would be in trouble.

China, which holds roughly $1.3 trillion in US Treasury bonds, and is quite vulnerable to a US economic collapse, criticized lawmakers handling of the debt ceiling debate. State-owned Chinese media lambasted it as a ‘manufactured crisis’.

Russia, the 11th largest holder of US debt with $131.6 billion, has significantly reduced its stake in Treasury Bonds.

According to Bloomberg, Russia has trimmed its holdings by 25 percent from a record high on October 31, 2010. 

“Such events result not only in short-term jumps in volatility, but also an erosion of trust in the dollar as a reserve currency and the American financial system as a whole,” Nabiullina told Bloomberg in an emailed statement on October 15.

Russia’s central bank, though not currently reducing US reserves, is looking to diversify their currency reserves to Australian dollars and New Zealand dollars.

Trapped Treasure

Political ping pong in Washington may affect future Central Bank reliance on US Treasuries, but for now, most banks are stuck with what they have.

“For governments and central banks that already hold a lot of treasuries, it’s already too late to exit, from an investment point of view,” Martin W. Hennecke, chief economist at Henley Group Ltd, told RT.

If China or any country starts selling their treasuries, it would send the debt servicing price up, which could quickly inject into markets and kill the sale of all remaining bonds, essentially creating a bubble.

“China is trying to buy more gold, they actually imported over 2 dozen tons of gold over the last two years through HK, and they are trying to increase the gold part of their reserves. It’s difficult for them to do this without driving prices up. Russia and China are both buying,” the Henley Group expert said.

“China understands they made have to eventually write off part of their US Treasury bond part of their reserve currencies,” Hennecke said.

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