Banking & Finance

Dagong digs in

Why a Chinese rating agency is downgrading America’s debt

Dagong digs in

Guan: we are not amused

It takes a lot of courage to champion unpopular views. Those who do so are often held up for ridicule, but once in a while (with luck) public recognition can follow. Star American bank analyst Meredith Whitney made her name on a deeply unpopular call – and now China’s leading debt-rating agency has stepped out onto the same ledge.

Whitney received death threats when, in late 2007, she published her view that Citigroup would have to cut its dividend.

But as the financial crisis began to bite (and Citi duly slashed its dividend) she became one of the few faces on Wall Street to emerge with her reputation enhanced.

The same could not be said for the ratings agencies, who have beenlambasted for bestowing their highest (triple-A) rating on some mortgages that turned out to have almost no creditworthiness.

The crisis brought the two leading agencies – Standard & Poor’s (S&P) and Moody’s – into the regulatory firing line. And their failure to protect investors from the subprime mortgage catastrophe seems to have encouraged others to launch rating agencies of their own. Whitney herself recently applied to the SEC to start a new ratings house

She’s not alone. China’s Dagong Global Credit Rating is also trying to benefit from its rivals’ misfortune. Yes, its request to open for business in the US has already been turned down twice (in April and again in September). But that hasn’t stopped it seeking a higher profile.

One way to do that is by making a bold call – and hopefully getting it right. But unlike Whitney, Dagong’s target wasn’t an individual bank, but a sovereign state. Dagong pegged US sovereign debt at just AA, which (perhaps symbolically) is just below its rating for Chinese debt. It then upped the ante, downgrading US debt again, to just A+ ranking.

For the time being, the Western media seems to regard Dagong as an amusing curiosity. Dagong takes itself rather more seriously. Its reply to the SEC’s rejection of its US overtures was telling (albeit a little strangely worded): “China, as the biggest creditor of the United States, shall share the discourse power of credit rating in the US market.”

Dagong is privately owned. But by rating US debt so low (compared to other rating firms) it also seems to relish a wider responsibility. “The serious defects in the United States economic development and management model [relying on credit-based growth] will lead to the long-term recession of its national economy,” its analysts argue. This, it pointed out, could lead to a “drastic decline of the US government’s intention of repaying debt.”

The report even came with a veiled threat. Dagong argued that QE2 “severely harmed the interests of creditors,” and would inhibit the US’ ability to “attract dollar capital reflow” [i.e. China might stop buying US debt].

Time for others to pull their socks up, too. “Standard & Poor’s failed to identify the debtor nations’ currency depreciation, which infringed the interests of the creditor nations,” Guan Jianzhong, Dagong’s outspoken chairman told the Financial Times. “Such practice is the fundamental cause weighing on the instability of the international credit system.”

Guan’s next hurrah could come sometime in the first quarter. According to TIME, early next year the US will reach the $14.3 trillion national debt limit imposed by law. Only Congress can raise the ceiling. It did so last year, but only thanks to a Democrat majority in both houses – not a single Republican voted in favour. The magazine reckons with the Republicans in control of the House of Representatives, this time round they may not vote for an increase.

That could even see America defaulting on its debt, a state of affairs TIME calls “potentially catastrophic”. Perhaps it might even give Dagong’s downgrades a ‘Whitney moment’ of their own.

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