China Says American Debt is Not Safe

A barely known Chinese rating’s agency is crying out for a more ‘realistic and fairer’ international credit risk system.

Right now, the international risk system is dominated by three main companies: Moody’s, Standard & Poors and Fitch.

All three of these companies, didn’t see the global financial crisis coming, or the European debt crisis coming. And it’s precisely these events that Dagong International is using to its advantage.

But you can’t help but feel that this company has its own agenda.
Firstly, this Beijing based company claims to be completely independent of government interference as it’s privately owned. However the company made its most recent announcement at the Communists Party’s favourite propaganda machine, the head office of Xinhua News Agency.

And before we even get to the comments Dagong has made regarding the status of American debt, let’s not forget that China has recently invested more than USD$900 billion (AUD $1.02 trillion) in US Treasury debt.

So at the very least, you can say this company has a vested interest in promoting China.
This is where it gets interesting.

You see, Dagong has said that because of the strong hold that the three credit rating agencies have over the international market, China has been rated unfairly. In fact the company feels that they isn’t being given due credit for the strength of the economy and relatively low level of debt.

Some experts have agreed that the Western nations tend to judge developing nations unfairly.

And for the moment, we won’t even suggest that China is cooking their books, because this new agency does have a couple of valid points.

Shockingly, this new ratings agency has said that American debt deserves to be rated worse than Chinese debt. Which is at odds with the three major rating companies because they all believe that American debt is perfectly safe.

Actually, all three of the ratings power houses call it the ‘world’s safest’ debt.

Yep, this is the exact same three companies that gave mortgage-backed investments a high rating. And yes, the exact same mortgage-backed investments that have the States in the sticky debt-laden bed they now lay in.

It’s refreshing to another point of view on the matter. Something the rating’s industry desperately needs.

Yet, Dagong is only pointing out the obvious when it comes to the current financial problems in the US. The main reason the company rates America lower than China is because of the slow growth and high debt. As Dagong explains it, increasing borrowing costs and the risk of default for America is extremely high.

But here’s thing. We are really only just beginning to understand the debt problems unfolding in America. The all important ‘economic indicators’ are suggesting that a double-dip recession is looming.

This information isn’t new, but for months now everyone has chosen to believe that the recovery will happen. Because let’s be honest, who wants to think that things could get any worse for America?

So whose advice do we trust more? The powerful agencies that ‘own’ the ratings space and ‘missed’ all of the events that lead up to the GFC? Or a company that clearly has its own interests to look after?

Right now, we’d be suggesting neither. But it’s refreshing to finally have another opinion in the international credit ratings business, even if the company will have to hide their communist leanings.

Shae Smith
Assistant Editor
For Money Morning Australia

Tagged as: agency, American, china, company, crisis, debt, financial, investments, market