- The Washington Times - Thursday, September 2, 2010


The big three credit-rating agencies that totally missed the meltdown of the subprime mortgage market - Moody’s, Standard & Poor’s and Fitch - still give the United States a AAA credit rating. But there’s a newcomer in the credit-rating game - Dagong Global Credit Rating - which has a very different view of the strength of U.S. finances.

Beijing-headquartered Dagong, the dominant credit agency in China, is pushing into international markets. This summer, it rated the sovereign debt of 50 nations making up 90 percent of the world’s economy. While Americans still tend to regard U.S. Treasuries as the “safest investment in the world,” Dagong gave our debt a mere AA - lower than that of 11 other countries (including China, which it awarded an AA+). To add insult to injury, the firm declared the U.S. outlook to be “negative.”

Dagong has set off something of a hissy fit in the credit-rating world. “The Western rating agencies are politicized and highly ideological, and they do not adhere to objective standards,” Chairman Guan Jianzhong told the Financial Times in July. The company also accused U.S. agencies, which share an oligopoly enforced by government fiat, of contributing to the 2007-08 financial crisis by applying the coveted AAA rating to loads of junk subprime mortgage debt.

The chairman of McGraw-Hill, owner of Standard and Poor’s, accused Dagong of pandering to popular prejudice, insisting that S&P and the other agencies have been unfairly targeted by politicians, pundits and competitors. Also, he countered that Dagong lacks transparency in its policies and procedures.

We can debate forever whether the U.S. agencies employ more analytical rigor in the rating of their sovereign debt than Dagong, but let’s be clear about one thing: Dagong is not a chump outfit. The company boasts of more than 500 employees, including more than 200 analysts with master’s degrees or doctorates and 50 with postdoctorates. The Chinese finance ministry has directed the company to “participate in the construction of [the] Asian bond market.”

If for no other reason, Dagong’s appraisal of U.S. debt is worth heeding because it influences the thinking of the Chinese government and those in charge of investing surplus Chinese capital. As long as China remains the No. 1 owner of U.S. Treasury securities, the opinions of the Chinese matter - whether we like them or not.

Dagong’s analysts dissect the “institutional” strength of a country as well as “government fiscal conditions.” Institutional strength reflects an economy’s ability to create new wealth and revenue. Fiscal condition refers to the ability of the government to service its debt. “Countries with [a] relatively low level of debt burdens are bound to have higher credit ratings,” Dagong states in its report on the Top 50 countries. “For some developed countries, due to the long-term stagnation of economic growth, there are obvious declines in their comprehensive strength, and their fiscal conditions turn to be fragile.” (I’m betting that Dagong’s financial analysis is more elegant than its English.)

Dagong gives its highest, AAA ratings to Norway, Denmark, Luxembourg, Switzerland, Singapore, Australia and New Zealand. Canada, Netherlands, China and Germany win AA+. The U.S shares the third rung, AA, with Saudi Arabia. In Dagong’s appraisal, the institutional strengths of the United States and the leading European economies are somewhat offset by their deteriorating fiscal conditions.

Americans may not like to hear the truth, but there is no gainsaying the massive budget deficits, the mounting national debt, the current economic weakness, the expansion of entitlements and the coming wave of retiring baby boomers.

The Chinese may well be acting upon Dagong’s analysis. As of June, the Chinese still held on to the top spot as the largest foreign owners of U.S. debt - $803 billion - but they tempered their purchases in the past year even as the Treasury Department issued record levels of securities. Indeed, between April and June, the Chinese sold $14.8 billion in Treasuries.

Why does this matter? Because the Chinese are the world’s largest source of surplus capital. The Europeans and Asian Rim nations are aging rapidly; savings rates are leveling off or declining as their populations enter retirement and draw down assets. China has another 15 to 20 years before its frugal population shifts from saving to spending on a large scale. If the Chinese are reluctant to purchase U.S. securities at current yields, the only way to entice them will be to raise interest rates. With more than $13 trillion in debt, most of it in short- and mid-term securities, the U.S. will find its finances buckling under a higher interest burden in the years ahead.

James A. Bacon is the author of “Boomergeddon” (Oaklea Press, 2010) and the blog by the same name.

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