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Dagong Credit Ratings Agency Downgrade of US to A+

Dagong Credit Ratings Agency Downgrade of US to A+

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Published by Edward Harrison

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Categories:Business/Law, Finance
Published by: Edward Harrison on Nov 10, 2010
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12/13/2010

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Surveillance Report for Sovereign Credit RatingThe United States of America
Sovereign Credit Rating:
 
Local currency/outlook:
 
A+/negativeForeign currency/outlook:
 
A+/negative
Rating date: November, 2010Analyst: LU Sinan, DU Mingyan
Rating History:
 
Local currency/outlook:
 
AA/negativeForeign currency/outlook:
 
AA/negative
Rating date: June, 2010
Dagong has downgraded the local and foreign currency long term sovereign creditrating of the United States of America (hereinafter referred to as “United States” ) from“AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic declineof the government’s intention of debt repayment.The serious defects in the United States economic development and managementmodel will lead to the long-term recession of its national economy, fundamentally loweringthe national solvency. The new round of quantitative easing monetary policy adopted bythe Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar,and the continuation and deepening of credit crisis in the U.S. Such a move entirelyencroaches on the interests of the creditors, indicating the decline of the U.S.government’s intention of debt repayment. Analysis shows that the crisis confronting theU.S. cannot be ultimately resolved through currency depreciation. On the contrary, it islikely that an overall crisis might be triggered by the U.S. government’s policy tocontinuously depreciate the U.S. dollar against the will of creditors.The rating bases for downgrading the sovereign credit rating of the United States byDagong are as follows:
I. The U.S. government has not introspected on the question of thedevelopment and management model of the national economy from the globalstrategic perspective, which makes it very difficult for the U.S. to fundamentallychange the passive situation of economic development.
After the outbreak of the financial crisis, the United States government has adopted aseries of policies and measures aiming at rescuing the crisis and recovering the economy,
 
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such as: the government has purchased bad assets directly, injected capital to financialinstitutions and entity enterprises seriously hit by the crisis, increased investment in socialsecurity, education and energy, cut the tax rate of low and middle income families, andadjusted financial supervision, etc.. Looking at the effects, the U.S. government's effortshave achieved little success, falling short of initial expectations. The credit crunch is stillproceeding and even deepening. The development course of credit crisis has shown achart of debt crisis - economic crisis - monetary crisis - overall crisis. Currently, the U.S.credit crisis has developed into the monetary crisis phase. In order to rescue the nationalcrisis, the U.S. government resorted to the extreme economic policy of depreciating theU.S. dollar at all costs and this fully exposes the deep-rooted problem in the developmentand the management model of national economy. It would be difficult for the U.S. to findthe correct path to revive the U.S. economy should the U.S. government fail to understandthe source of the credit crunch and the development law of a modern credit economy, andstick to the mindset of traditional economic management model, which indicates that theU.S. economic and social development will enter a long-term recession phase. The mainevidences for this judgment are as follows:First, the credit expansion policy has changed both the economic fundamentals andthe operating mechanism of the U.S. economy. It is a basic state policy of the U.S. to takecredit expansion as an engine of economic development. As a result of the highlydeveloped domestic credit policy, the credit relations between the creditors and debtorshave become the basic economic relations between social members. In addition, aninternational credit system, with the U.S. at the core, has been built up on the basis ofinternational credit expansion, and international credit relations have become the basiceconomic relations between the United States and other members of the internationalcommunity. Thus, the formation of the U.S. economic foundation has been changed, andcredit relations have become a dominant driving force for economic and socialdevelopment, the paradoxical movement of credit relations determines the direction ofU.S. economic and social development. Due to the abuse of credit, the United Statesbecame a net debtor country in 1985. From then on, its economic and social activitieshave been completely based on the huge amount of debts. The status of thecreditor-debtor relations not only influences the development model and performance ofthe U.S. economy, but also constitutes the basis for the nation to choose economic regimeand make strategic choices.Credit expansion has also changed the forming mechanism of United States creditdemand, and the market has become the governing force to create the credit demand.The U.S. globalization of social credit has also reached a high level, 30% of which comesfrom foreign capital. Therefore, the national capacity to adjust social credit demandthrough monetary policy instruments such as the money supply and interest rate has beengreatly weakened. The change in the forming mechanism of credit demand hasfundamentally strengthened the dominant role of market in the economy, which indicatesthe market-oriented social credit relationship would fully influence the U.S. economic andsocial development. The status of credit relationships in the United States restricts thecountry’s creative capability of actual value by affecting its economic structure. The heavydebt burden which exceeds the real debt repayment capability forces the state apparatus
 
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to satisfy the country’s capital demand in the manner of surpassing the speed of valuecreation by the real economy. The over-expansion of virtual economy is the result of theparadoxical movement of the credit relationship in the United States. Thus, Dagongbelieves that as long as the policy of credit expansion remains intact in United States, thedevelopment model of financialization of the national economy would not be changed andthe key factors to induce long term economic recession would continue to play a role.Second, the economic financilization and industrial hollowing-out in the United Stateshas broken the normal relationship between the financial system and real economy,leading to the pursuit of the virtual wealth. As social capital was largely sucked into thefinancial system, the value of a huge amount of financial assets operating away from theunderlying assets and basic economy is amplified in a surprising manner, making peoplemore concerned about the increase in virtual wealth and less interested in creating realwealth; and a large number of entities were transferred overseas, resulting in a seriousindustrial hallowing-out, thus the country’s creative capability of actual wealth has beenseverely weakened. In addition, as the government has long relied on borrowing to carryout its administrative functions, it would gradually lose the autonomy to manage theeconomy though effective exploration of fiscal policy, and finally has to resort to thebanknote printing machine, like killing the goose that lays the golden eggs. Theimprovement in the creative capability of actual wealth depends on the reasonablepositioning of the financial system and real economy, and the adjustment process willdetermine the U.S. economic recovery and vision for future development.Third, the U.S. global hegemonic strategy has consumed enormous national financialresources, but its own capacity of wealth production is insufficient to support its hugestrategic target. The dependence on issuing national debt or U.S. dollars to carry out itsstrategy not only lacks sustainability, but also becomes the root of yielding fiscal deficit. Abalance of state revenue and expenditures is advantageous to the sustained developmentof the U.S. economy. However, it is almost impossible for the U.S. government to abandonits global strategy. Hence, it will become a long-term factor to hinder the U.S. economy.Fourth, long-term dependence on the U.S. dollar depreciation to export debt is notonly harmful to the creditor’s interests, but is also unable to solve its debt dilemma. Theproblem of the national development strategy is that it causes the U.S. government tobear a huge debt burden; however the U.S. government is unwilling to adjust its strategyto reduce debt; rather, it believes that exporting debt through the U.S. dollar depreciationis more compliant with the interests of the United States. Although the U.S. dollardepreciation forces creditors to transfer their interests to the US, it will reduce the marketconfidence in U.S. dollars, which may trigger the trend of selling U.S. dollars. Hence, it willchange the international currency system pattern, and the U.S. dollar hegemonic statuswill be shaken inevitably, which will ultimately affect the backflow of U.S. dollars, hinderingthe international financing channel of the U.S. government directly, and reducing its debtincome. The debt income concerns the prosperity of the United States. To avoid theoutbreak of debt crisis, it has to issue additional currency to solve the problem ofinsufficient debt income. Hence, the U.S. dollar starts a new round of depreciation,circulating on and on, which intensifies the risk of debt repayment inevitably.Fifth, the reform of financial and rating systems has failed to fully reflect the essential

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