China's Dagong Downgrades US To A- From A
- China
- Creditors
- Debt Ceiling
- default
- Fitch
- Gross Domestic Product
- Housing Bubble
- Monetary Policy
- National Debt
- Nominal GDP
- Quantitative Easing
- Rating Agencies
- Rating Agency
- ratings
- Reserve Currency
- Sovereign Debt
Since all US rating agencies (Fitch is majority French-owned) have been terrified into submission and will never again touch the rating of the US following the DOJ's witch hunt of S&P, any US rating changes on the margin will come from abroad. Like China's Dagong rating agency, which several hours ago just downgraded the US from A to A-, maintaining its negative outlook. The agency said that while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged. "Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."
Among the other Dagong zingers:
- The partial U.S. federal government shutdown apparently highlights the deterioration of the government’s solvency, pushing the sovereign debts into a crisis status.
- Since the outbreak of the U.S. debt crisis in 2008, the deviation between the federal government's sources of debt repayments and the country’s real wealth creation capacity has been constantly broadened. The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term. The federal government debt stock increased by 60.7% between 2008 and 2012 when the nominal GDP increased by only 8.5% while the fiscal income decreased by 2.9%, which indicates that fiscal income is losing its means as the primary source of debt repayments.
- Liquidity has been continuously injected into international financial markets from the U.S., which indirectly plays a key role in combating against the risk of government default. This implicit debt default behavior infringes upon the benefits of creditors.
- The debt ceiling has been extended continually, increasing the total amount of the federal government debts. In order to avoid the sovereign debt default, it becomes an inevitable choice for the U.S. government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government’s solvency.
- The Democrats and the Republicans of U.S. do not have a consistent strategy target to solving the sovereign debt problem.
To be sure a Chinese rating agency is just that, Chinese, and its opinions are rooted in nationalistic pride as much as S&P and Moody's AAA take on the housing bubble in 2005-2007 were rooted in mathematical logic, but the implications of this latest shot across the bow by the country which last weekend said the time has come to strip the dollar of its reserve currency status, are clear. And, at its core, Dagong is correct: because all the US really has done is kick the can for another three months, something the domestic rating agencies would also admit if they were not terrified of expressing the truth.
The logic in the full Dagong release below is self-evident:
Dagong Downgrades the U.S. Sovereign Credit Ratings to A-
On October 16, 2013 EST, the U.S. Congress approves the resolution to end the partial government shutdown and raise the debt ceiling. By such means the U.S. Federal Government can avoid the default crisis for the moment. However the fundamental situation that the debt growth rate significantly outpaces that of fiscal income and GDP remains unchanged. For a long time the U.S. government maintains its solvency by repaying its old debts through raising new debts, which constantly aggravates the vulnerability of the federal government’s solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future. In light of these facts, Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) decides to downgrade the local and foreign currency credit ratings of the U. S., which has already been on the negative watch list, to A- from A, maintaining a negative outlook. The rationale that supports the conclusion is as follows:
1. The partial U.S. federal government shutdown apparently highlights the deterioration of the government’s solvency, pushing the sovereign debts into a crisis status. The U.S. federal government announced its shutdown on Oct. 1, 2013, a radical event that reflects the liquidity shortage aroused by depleting stock of debts without the increase of new debts, directly resulting in the federal government lack of the funds for its normal function. The partial U.S. government shutdown is an inevitable outcome of its long-term failure to pay its excessive debts. During the fiscal years from 2008 to 2012, the ratio of the federal government’s stock of debts to fiscal income increased from 4.0 to 6.6. Under such circumstances, the federal government that can hardly sustain its own expenses, not mentioning collecting reliable income to cover its huge amount of debts. Substantial decrease of the U.S. government’s solvency is proven by this shutdown incident, which pushes the federal government into a crisis position of debt cliff and default.
2. Since the outbreak of the U.S. debt crisis in 2008, the deviation between the federal government's sources of debt repayments and the country’s real wealth creation capacity has been constantly broadened. The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term. The federal government debt stock increased by 60.7% between 2008 and 2012 when the nominal GDP increased by only 8.5% while the fiscal income decreased by 2.9%, which indicates that fiscal income is losing its means as the primary source of debt repayments. Because of the fact that the federal government now depends highly on borrowing new debts to repay its old ones, vulnerability of its debt chain is accumulated so that technically debt default may occur at any time. For the fundamentals of government debt repayment condition will not be essentially improved, the federal government's debt cliff will persist in the long term.
3. Liquidity has been continuously injected into international financial markets from the U.S., which indirectly plays a key role in combating against the risk of government default. This implicit debt default behavior infringes upon the benefits of creditors. In order to avoid the debt default caused by the lack of debt repayment sources such as fiscal incomes, the U.S. government has been taking advantage of the international currency dominance of the U.S. dollar to monetize its debts and has been taking quantitative easing monetary policy to maintain its government solvency since 2008. The devaluation of the stock of debts hereby directly damages the creditors’ interests. Dagong estimates that the depreciation of the U.S. dollar caused a loss of USD628.5bn on foreign creditors over the years of 2008 to 2012.
4. The debt ceiling has been extended continually, increasing the total amount of the federal government debts. In order to avoid the sovereign debt default, it becomes an inevitable choice for the U.S. government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government’s solvency. Ever since Obama’s inauguration in 2009, the U.S. Congress has extended the debt ceiling for five times, reaching a total volume of USD5.1tn. This further raise of the debt ceiling shows the government’s incapability of improving its solvency by improving the basic economic and fiscal elements.
5. The Democrats and the Republicans of U.S. do not have a consistent strategy target to solving the sovereign debt problem. As the issue of paying sovereign debts falls into a tool that the parties make use of to realize their own interests, the political environment is unfavorable for eliminating the risk of its sovereign debt default in the long term. The recurrence of the bi-partisan conflict over debt ceiling once again reveals the U.S. superstructure’s incapacity to solve national debt crisis. A debt crisis evolves into a political crisis, which in turn exacerbates the debt crisis. Such political
environment over debt repayment renders the dim and pale prospect of the U.S. federal government’s solvency.
environment over debt repayment renders the dim and pale prospect of the U.S. federal government’s solvency.
http://rt.com/business/us-government-shutdown-losses-256/
'Manufactured' crisis cost US $24bn -S&P
Standard & Poor's says the shutdown in total cost the US economy $24 billion, or $1.5 billion per day, the rating agency said Wednesday. The agency also estimated the shutdown will pare fourth quarter GDP by 0.6 percent.
Obama has signed legislation that will avoid a technical debt default, ending the 16-day partial shutdown of the government that has cost the world's largest economy billions of dollars.
"The bottom line is the government shutdown has hurt the US economy," the S&P statement said.
Moody’s Analytics has estimated the government shutdown could cost the US government up to $55 billion, the same amount as devastating Hurricane Katrina in 2005.
The deal will reopen the government after 16 days of partial shutdown and fund spending through January 15 while extending the $16.7 trillion debt ceiling through February 7. This time frame would be longer than the 6-week extension Obama promised to veto.
The next major deadline is the December 13 target date for a budget negotiation.
US Speaker Boehner did not block a vote on the legislation in the House, as the lower chamber passed the bill 285-144, putting an end to the weeks-long stalemate.
The Senate passed the plan earlier Wednesday by a vote of 81-18.
If the ceiling wasn’t lifted by October 17, the world’s biggest economy would not have had enough cash on hand to pay its bills.
Previously, IHS Global Insight, a Massachusetts-based research firm, estimated the shutdown was costing America $1.7 billion per week in lost economic output according to a study.
Shutdown.com, whose data models and averages the IHS estimate, marks the cost of the government shutdown at $4.7 billion.
The financial burden of the shutdown has already surpassed the at least $2 billion in destruction brought by floods and mudslides in Colorado in September, according to Eqecat Inc., a California-based catastrophe-risk consultant.
Damage is done
In place for almost a century, first introduced in 1917, the US has never defaulted on their debt. Republicans and Democrats have used the debt ceiling as a political gambit to rehash budget wars, and every time, put investors on nerve and world markets on edge. These political games have damaged the US' reputation, and could have a lasting effect.
State-owned Chinese media lambasted the US for creating “manufactured crises”. China, which holds the lion's share of US foreign debt in dollar reserves, nearly $1.3 trillion, would have a lot to lose if it wakes up on October 18 and the US dollar has tanked and Treasury bonds and yields fall.
Fitch Ratings agency announced on Tuesday it has put the United States’ ‘AAA’ credit rating on review because of the stalled debt ceiling negotiations.
The ‘political brinkmanship’ and ‘reduced financial flexibility’ of the US were cited as reasons to consider downgrading the superpower. The 26 day shutdown in 1995-1996 cost the US economy over $2.1 billion in current dollars, according to the Office of Management and Budget Data.
However, the far-reach of the American economy and the dollar as a reserve currency may preserve the US’s dominant role in the world economy.
“While the US economy still growing and remains the most efficient in the world, it cannot worry too much about their image,” Igor Nikolaev, director of the strategic analysis department at PKF told RT.
US gross domestic product is still projected to grow 2 percent in the fourth quarter, but some economists worry the dollar, already at an 8-month low, is at more of a risk because of the default, and the more politicians play with fire and brinkmanship the markets will flinch.
Last time Congress debated the debt ceiling in 2011, Standard & Poor dropped the United State’s ratings from AAA to AA+.
The first shutdown in 17 years hit America at a vulnerable time, as it is still digging its heels out of recession and starting to recuperate from the 2008 financial crisis, which stemmed from America’s ‘too big to fail’ banking industry.
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