Chinese agency Dagong cuts US ratings

BEIJING: China’s Dagong Global Credit Rating Co, one of the country’s most prominent ratings firms, yesterday cut the local and foreign currency sovereign ratings of the United States, citing an increasing reliance on debt in the world’s largest economy.

Dagong said in a statement that it cut the sovereign ratings to BBB+ from Aand also placed them on a negative outlook.

The growing reliance on the debtdriven mode of economic development will continue to erode the solvency of the US federal government, the Beijingbased rating agency said.

In December, US President Donald Trump signed into law a package of tax cuts that will add US$1.4 trillion (RM5.5 trillion) over a decade to the US$20 trillion national debt.

“Deficiencies in the current US political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track,” Dagong said.

“Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weakens the base of government’s debt repayment.”

The US embassy in Beijing could not immediately comment.

International ratings agencies Fitch and Moody’s Investors Service both give the US their top AAA ratings. S&P Global has put the US on a slightly lower grade of AA+ since 2011.

In December, the US government reported a US$23 billion deficit, compared with a gap of US$27 billion from the year-earlier month. That took the deficit for the fiscal year to date to US$225 billion, versus a gap of US$210 billion a year earlier.

The government will have to raise the debt ceiling frequently, Dagong said.

“The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis,” the Chinese rating firm said.

Last week, Bloomberg News reported that Chinese officials reviewing the country’s vast foreign exchange holdings had recommended slowing or halting purchases of US Treasury bonds, partly because that market is becoming less attractive for them. That spooked investors worried that sharp swings in China’s massive holdings of US Treasuries would trigger a selloff in bond and equity markets globally. The report sent US Treasury yields to 10month highs and the dollar lower.

China’s foreign exchange regulator has since dismissed the report.

“The market’s reversing recognition of the value of US Treasury bonds and US dollar will be a powerful force in destroying the fragile debt chain of the federal government,” Dagong said. – Reuters