Chinese credit ratings agency downgrades US to A-

SurveyChinese credit ratings agency Dagong Global Credit Rating has downgraded the local and foreign US sovereign credit rating to A- from A, maintaining a negative outlook.

Despite yesterday’s solution to end the partial government shutdown, Dagong says the country is “still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future”.

US congress yesterday narrowly avoided a default. However, Dagong says the shutdown highlights the deterioration of the government’s solvency, which is pushing US sovereign debt into a crisis status.

Dagong says since the financial crisis, the deviation between the federal government’s sources of debt payments and the country’s real wealth creation has constantly broadened.

“The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term,” Dagong says, while also raising concerns over the size and length of monetary stimulus.

Further, it notes that the debt ceiling has been extended continually, which increases the total amount of debt.

The Democrats and the Republicans of the US do not have a consistent strategy target to solving the sovereign debt problem, Dagong says. The recurrence of the bi-partisan conflict over debt ceiling “once again reveals the US superstructure’s incapacity” to solve the national debt crisis.

Fitch, one of the largest credit rating agencies, has placed the US government’s AAA credit rating on negative watch, while Standard & Poors kept it at AA+ and Moody’s at Aaa.

The BlackRock Investment Institute, however, warned yesterday that the “political dysfunction” in the US is taking a toll on the country’s sovereign credit risk.

Keith Wade, chief economist at Schroders, echoes comments by Winston Churchill that “the Americans will always do the right thing, but only after having exhausted all the alternatives”.

Wade warns that the shutdown will have depressed US growth and adds that the same conflict may reoccur next year, which he says is hardly going to fill investors and businesses with confidence to go out and spend.

Economic data, Wade says, has been delayed, distorted and depressed by the shutdown and it will not be possible until early next year to get a clear picture of the fourth quarter.

“The risk of another political stand-off will also weigh on Federal Reserve deliberations,” Wade says, adding that tapering is not likely to begin until March next year, possibly being delayed until June.

Meanwhile, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, appears upbeat over the US debt deal.

“My guess is any new fiscal tightening will be large enough to matter to Republican politicians looking to save face but small enough not to matter to markets or the economy,” he says.

“This could be the last standoff for a while.”

Greetham predicts that there will be little appetite for a re-run in the new year and the more the recovery shrinks the US budget deficit, the less this fight will resonate with the electorate.

“Meanwhile it's a positive backdrop for stocks,” he adds. “The world economy is strong and with inflation low no major central bank is even thinking of raising rates.”

Peter O'Flanagan, head of trading at Clear Currency, says the market’s reaction was as expected with sentiment rising and equity markets advancing to close 1.5% in the US.

©2013 funds europe