Blog
August 9th, 2011

U.S. credit already downgraded in China

by Peter Miller

 

foreign currencyIt’s a done deal.

Standard & Poors has reduced the credit standing of the United States from AAA to AA+. Not just a state or company, not a toll road or utility, but the entire country.

This is serious business

The downgrade now the lead story for every newspaper and business blog you can find (as it should be).

 Having just had a major fight regarding deficit reduction and no new taxes, there is now a very real chance that the cost to borrow trillions of dollars will increase. That means additional money will be needed to finance the debt and not actual government services.

U.S. credit rating has already been downgraded

What’s missed in the recent and massive coverage is that Standard & Poors is the SECOND major credit rating agency to reduce the standing of federal debt.

The first agency to do this was the Dagong Global Credit Rating Company. It lowered the U.S. rating on August 2, 2011 “from A+ to A with a negative outlook.”

Surely not as well know as Standard & Poors–at least not in the U.S.–Dagong describes itself like this:

As the most influential founder of China’s credit rating industry and market, Dagong has all franchise qualifications granted by the Chinese Government, and is an official institution providing credit rating services for all bond issuers in China.

Get it? This is a company which has a lot to say regarding where China invests its massive surplus.

Why did Dagong reduce our credit rating?

According to last Tuesday’s announcement:

At this crucial juncture. neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest: they had a hard time making the correct choice in a timely manner leaving the world in terror, which highlights the negative role of the US political system on an economic basis. This incident will definitely exert its continuous impact on investors’ confidence in US Treasury bonds, affecting the stability of the US debt income. 

This needs to be taken this seriously

We need China to roll-over its investments in U.S. government securities. The Treasury Department reports that the United States has $4.5 trillion in U.S. securities which are held by other nations. The largest investor is China with $1.160 trillion.

Behind China, there’s Japan ($912 billion), the United Kingdom ($346 billion) and the “oil exporters” ($230 billion–a group which includes Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria).

The irony of the Dagong credit rating is that on one hand it has some importance, while on the other it comes from a country where there is no Democratic, Republican or any other party save one, a place where dissidents wind up in jail, huge numbers of people live in poverty, and skilled steel workers get 75 cents an hour for a 16-hour day.

Dagong is right

And yet, Dagong is right when it says:

The pace of the US deficit cut is far lower than that of new debt growth and the fiscal policy of revenues falling short of expenditures will surely keep pushing the US government debt to a higher level.

In other words, it’s not enough to reduce spending.

We have to raise taxes.

This will surely be at the heart of the next debate in Washington, a debate which has already started.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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