Rating Agency Wars 2: The New Evil Empire Strikes Back - Dagong Says Likely To Downgrade US Even If Debt Limit Raised

Tyler Durden's picture

When on July 4 we reported the patriotic decision by Moody's to suddenly discover that up to 10% of China's GDP is concentrated in previously undisclosed bad debt, we suggest that "Dagong downgrades the US to junk status in 5, 4, 3..." Well, it's one and a half. China Daily has just reported that according to the notorious abovementioned Dagong rating agency, "The US' sovereign credit rating is likely to be downgraded regardless of whether the US Congress reaches an agreement on raising its statutory debt limit. "If the debt limit is raised and the public debt continues to grow, it will further damage the US' debt-paying ability, which is a key factor in Dagong's evaluation, and we will consider lowering its ratings accordingly," said Guan Jianzhong, chairman and CEO of Dagong. "If the raised limit fails to pass and the US faces default, the rating will be immediately and substantially downgraded," he said. According to Guan, the downgrading is really just "a matter of time and extent". And if Europe is suffering now, after Moody's has discovered religion and is slapping ratings downgrades at each and every PIIG, just wait until the global Nash equilibrium collapse in the rating agency Ponzi preservation prerogative goes trans-Pacific. Because following the imminent Dagong downgrade, Moody's and S&P will retaliate yet again, this time likely throwing Japan into the fray yet again, until such time as virtually the entire overleveraged world declares any and all rating agency employees persona non-grata.

From China Daily:

Guan spoke after the US Treasury Department warned that the nation will exhaust its borrowing authority under the $14.29 trillion debt limit on Aug 2 and urged Congress to raise the statutory debt limit "to avoid the catastrophic economic and market consequences of a default crisis".

The three major international rating agencies, Moody's Investors Service Inc, Fitch Inc and Standard & Poor's Financial Services LLC (S&P) each warned in June that they would downgrade the US sovereign credit rating in the event of a default.

The country's rating now stands at A+ in domestic and foreign currency on Dagong's list, with negative outlooks to its future, much lower than the result of the US rating agencies.

Dagong's rating was downgraded from AA on Nov 9 after the US government announced a second round of quantitative easing (QE2).

The SEC, which has taken the time to log out from whichever porn server is the choice du jour, had something to say:

The US Securities and Exchange Commission denied Dagong's application for Nationally Recognized Statistical Rating Organization (NRSRO) status because it is not able to implement cross-border supervision to the agency.

Translation: the SEC i) has no aspirations to find gainful employment for its rotating door executives at Dagong and ii) the Chinese rating agency refuses to play kick the ponzi down the street.

Which is why anything they say should carry infinitely more weight than what our own NRSRO care to share:

"Raising the limit is just a legislative measure to allow the government to borrow more money, but it does not change the fact that the US lacks momentum for economic growth," Guan said, adding that if the inflation and unemployment rates remain unchanged, the US government might turn to QE3.

The fundamental problem is that the US' ability to generate wealth is far from compensating its increasing debt, and "paying debts by borrowing more is not a solution," he said.

"Neither the $2 trillion QE nor raising the debt limit is an effective measure. And the sovereign debt crisis will continue," Guan said, explaining that the US government spent huge amounts on consumption and social security, and had limited resources left for economic development.

Some more brutal logic about how a downgrade of the US by China is akin to playing Russian roulette with 6 live rounds:

Yuan Gangming, a researcher at the Center for China in the World Economy (CCWE) at Tsinghua University, said the US government is currently in an abnormal post-crisis period, so increasing the scale of debt will be a long-term and regular measure before the country's economy is back on track.

So raising the debt limit would be good news for investors, but bad for China, the largest holder of US Treasury securities, he said.

"Although reducing US Treasury holdings seems like a choice, China will have to continue its investment, because, after all, we have very limited choices of investment," Yuan said.

Well, there is the EURUSD, which SAFE has bought about 50% of all that has been offered in the past several weeks.

That said, look for the next several months to be quite exciting as China and US start playing pass the downgrade in earnest. Although something tells us the USD-CNY peg will remain long after both countries have junked each into into oblivion.

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whaletail's picture

Question: do ratings agencies have any more detail into securities than most of us shmohs or are they analysts looking at the same data as us and who are smart enough to go across to the sell side, but lack the huevos? A disoriented, yet hopefully answerable question (in generalities, of course)...

Mr Lennon Hendrix's picture

Your question is very general.  More detail as to what?  How the FBI spends its money on toilet paper?  What do you want to know?

66Sexy's picture

"Debt ceiling raise"? What exactly is that supposed to solve?

The money is going entirely to Social Security, Medicare/Medicaid, Interest on the debt, Unemployment benefits, and defense.

More non productive, non equity debt expansion for entitlements.

How long will this keep the turd floating? 

Going Loco's picture

Your question is very pertinent. Here is Einhorn's view of the ratings agencies (from 2009):-


My firm recently met with a Moody's sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody's does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook – only 12-18 months – to analyze data to assess countries' abilities to finance themselves. Moody's makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work.

Their main role, again, appears to be to tell everyone that things are fine, until a real crisis emerges at which point they will pile-on credit downgrades at the least opportune moment, making a difficult situation even more difficult for the authorities to manage.

I can just envision a future Congressional Hearing so elected officials can blame the rating agencies for blowing it, as the rating agencies respond by blaming Congress.





bigwavedave's picture

that wasnt going to happen while the 'grandpa of omaha' (tm) was a big shareholder.

Mr Lennon Hendrix's picture

No shit, Greenlight!  You didn't pay for that opinion, did you?

r101958's picture

or, they will pile on when it is politically expedient.

oogs66's picture

typically they don't.  for corp's they may get some information ahead of a new issue that is non public until the deal is announced, but they issue their rating at the same time as the new issue

in fact for a lot of corps, bank loan groups are supplied non public information, so the rating agencies and bond guys have less info than the banks


and why does moody's have a chief economist who is on every tv show?  i can't imagine that being chief economist there is really the job any good economist wanted

A Man without Qualities's picture

As I understand it, they are supposed to make use of only publicly available info, but tend to have more conversations and better access to info that the average punter.

Remember, the ratings for sovereigns does not generate fees (so there is no direct benefit for rating as per ABS).  As I see it, the greatest flaw in rating the MBS/ CDO crap was that they relied on models provided by the issuers, but also remember that the issuers fudged the quality of the underlying assets in order to meet the ratings requirements.  This is the big stinking elephant turd of a securities fraud that lies festering in the room.  The ratings agencies were relying on the assumption the banks were adhering to the reps and warranties with regards quality of underlying loans, rather than just lying.

Having worked with people who'd come from the sovereign ratings teams, I think they are usually very good at current situation, but poor at projecting out and too trusting of official data (esp bullshit GDP numbers) and political promises.  They tend to be pretty honest and unbiased, but they are weak in understanding of contingent liabilities, pension obligations, derivatives etc, so they only see a part of the picture.

The other problem is they are too reactive and often too slow and the market usually has re-priced risk far before they change their rating.

However, in the last couple of years, the agencies seem to be far more politically motivated than ever before, but then I suppose they know that their existence depends on the continued protection of the US govt...

Peter K's picture

Like, who cares?

lolmao500's picture

Exactly. Markets won't care. Nor will the bond holders. Nor will the Chinese government. They will continue buying those shitty US bonds.

carbonmutant's picture

 Sounds like the Chinese are talking their book...

Downgrade of the US is good for the Euro, Yes?

Mr Lennon Hendrix's picture

Do I miss the days when Leo would post videos of Greek girls dancing on tables?  That is besides the point.  Banzai, you have more work than Heidi Montag!

wisefool's picture

Pretty please WB7: "Its on like Donkey Kong" with a Chinese Kong throwing barrels full of OPeC's (Other People's Currency) while Chi-Kong stands guardedly over barrels of oil and PMs.

It really will have lots of reuse over the next few years, and might actually explain to the average american (with or without a PhD) why debt actually can be bad.

Zero Govt's picture

you pictured my thoughts about 'Dadong' Banzai which is precisely what it sounds like!

..however we don't need Dadong to tell us the patently obvious that if the US doesn't raise the debt ceiling there's going to be a train-wreck or if they do raise it there's also going to be a train-wreck (just a little further down the line.. kick that can you morons in DC)

What is interresting is the monopolies S&P, Moodys and Fitch now have competition in China for global ratings. Dadong is going to downgrade the US Govt either way, what are the 3 stooges going to do and how stupid are they going to look if they don't?? 

..suffice to say, "It's on like Dadong Kong!"

expectplannedevents's picture

Will it be the Greece or the Downgraded Domino that unleashes the next economic nightmare?

There is no economic fix now. It's way to late and we're stuck with a clunker!! ..oil reserves are about out too.

Obama's Lawyer Professor..Sueing the FED! http://www.charlierose.com/guest/view/418

Kryten451's picture

Gads !  stand back people, the godfather of all talent shows

Dick Darlington's picture

Aah, so that's why futures are green.

Nero's picture

Dick Darlington

"Coupling" My Favorite Comedy Series Of All Time.......



Mr Lennon Hendrix's picture

It's getting exciting...

Nash...'If someone could stab you in the back, and you could stab them in the back...'

dperson's picture

Sino-Forest downgrades trees

Rick Blaine's picture

It's official.

I live in The Matrix.

Team O is running around like Chicken Little screaming that we HAVE TO raise the debt ceiling to keep the "full faith and credit" of the U.S. intact...

So, if we go into MORE debt, that will help our credit rating?

How...in...the...&%*@!...does that make any sense at all?!?!?!?!

I'm buying more guns and ammo tomorrow.

pitbull pappa's picture

Exactly!!!  The more I'm learning about how the financial system works... the more I think the same thing...

How...in...the...&%*@!...does that make any sense at all?!?!?!?!

Sadly no one in my life is paying attention to all this crazy sh!t & living in like all is well.



cossack55's picture

You're last comment is spot on. Do you also find yourself in the moral dilemma of deciding to buy even more food and ammo and guns for those family who are close and yet have their collective heads inserted up their asses.  Damn guns are expensive but I may need the manpower.  

slewie the pi-rat's picture

no one could have seen this coming!

Mr Lennon Hendrix's picture

That was what everyone said about QE 3 today, but if I am mistaken, plenty of people did not think that would happen.  QE Light is continuing QE, and Bernanke and his Fed are bringing on all takers.  Economics?  Get a grip!!!!  There is no economics, just philosophy.  Better run tell dat, Slewie.

TwoShortPlanks's picture

Sorry Pi-Rat, but I've been saying for over 12mths on my FB page and here on ZH that this will all come down to a Brand War between China and the US. And look what we have right now, a Financial Cold War...which is essentially a Brand War. What I didn't say was which side other countries would take.

slewie the pi-rat's picture

edit:  /sarc/   jeeez...  hall 0'mirrors...

2 short:  my comment was about dagong.

if you want to see this as an epic struggle between titans to the death, you will have plenty of footage and print copy to justify your thinking and perspective.

i see it more as theater.  people, companies, countries which have not protected their balance sheets are "underwater" which means they are bankrupt.  they can't pay what they owe already, or there is no reason to do so, unless: we continue to pretend things will get better when the econom recovers.  so, let's finance the debtors.   and we'll hafta print a lot of the money to fund the debts.  because there isn't enough for the job.  yet.

it's the international banksters playing tag and generating non-stop "have you heard" stories about doing something different.  but i think, as banksters, they're all on the same side.  they probably talk on the phone together all day long.  about printing money and how to use it.  that is their brand:  fiat money.   the other brand is vaseline.  have a nice war. 

but wait!  our brand is silver, gold, and whatever else the Liberty Bell has gonged into our nogginZ.  and they're stuck with fiat money!  shit!  not too shabby, eh?

SoNH80's picture

The U.S. Elite played a lead role in awakening the Chinese tiger 1971-2001, and now The Tiger is biting the U.S. Elite in the ass!  I'm lovin' it! Nixon, Bush Sr., Clinton, everybody outdid themselves in sniffing Chinese Politburo farts and calling them sweet, as the Maoist slogan went.... and now, The Tiger is wandering off the reservation.... hell, all might be according to plan, but judging by the stupidity of U.S. "leadership" generally, I'm not so sure. Cold War vs. U.S.S.R. long gone, along with E-Z outsourcing profits.... Just enjoying the sweet 'n sour Schadenfreude... wankers.

Village Idiot's picture

"no one could have seen this coming!"


words for the ages...

Zero Govt's picture

'Kapowww' ..."We hit a Black Swan" says Washington ...just like Lehmans, the bankers credit crunch, US property, US healthcare, Munis and soon the kicked can of US Govt debt 

..it's not like 30 years of cause and effect from political policies of ever more State intervention in free markets and Fed monopoly money. Nope, all these toxic tumours were 'surprise' attacks from a flock of Black Swans what did it, honest! Signed, GOP & Dems

TwoShortPlanks's picture

LOL...yup, this is shaping up to become a Financial Cold War...Brand USA versus the rest of the World. Actually, let's be truthful here, it's Wall Street and it's Puppet Government versus the rest of the World.

And Wall Street produces what?...anyone-anyone...Bueller?...Nothing!
I've been buying Silver Eagles...300 Million Americans will be after them, much more than Bullion...because they'll be legal tender soon enough.
Paper Silver = Worthless

Silver Bullion = Spot Price

Silver Minted Coin (Legal Tender) = Spot Price>

i-dog's picture

"shaping up to become a Financial Cold War...Brand USA versus the rest of the World"

Nonsense! You (and most others still inside the US) are not paying attention!

The US economy has already been dismantled! Now they're just shipping out the last remnants (like they shipped out the remnants of the Twin Towers to China after they deliberately blew them up). Big corporations are still shipping jobs out to new economic zones in China and elsewhere. The few remaining small businesses are being deliberately buried deeper in taxes and regulations. Actual unemployment is well in excess of 20%, while underemployment in the private sector is beyond comprehension. Social Security is bankrupt and the Feds are now also openly raiding pension plans...401Ks will be next. Soon you will be asked to make even more "shared sacrifices" by the President-For-Life! (NO...there will not be another sham election next year).

There is ZERO effort being made by either Congress or the White House to fix any of the above---just continued attempts to speed it up!

As Tiny Timmaah said over the weekend on 'Meet The Press': "Americans are going to experience times tougher than anything they have experienced in their lifetimes"

That's an understatement! For example, TSA gropers and x-ray machines at the airports are training exercises to expand them to ALL border crossings and internal control zones within the next 18 months. Once they are all in place, you will not be able to take any silver -- or anything else of value -- out with you. You may not even be able to travel interstate, let alone further afield, without permission or punitive taxation.

And for those holed up with guns 'n' butter: Firearms will be banned under a UN treaty and the government will request that you hand in your arsenal "to defeat the terrorists". If you resist this heart-felt call to "do your patriotic duty", expect to be dragging your wife and kids into a re-run of Waco on your street or country lane! You will be 'visited' by a crack team of middle east veterans (not necessarily US vets, either!) well used to going door-to-door with stun grenades and humvees to flush out recalcitrant "terrorists". Predator drones will soon be 'visiting' remote farmhouses in flyover country looking for illegal vegetable patches and gun-toting terrorists.

All of that is just for the US ... it's TPTB's answer to the US flipping the bird to the Anglo-German monarchy in 1776. It has been planned for a very long time to bring the wayward child back under the control of the European aristocracy ... so, Queen Betty's great-great-great-great-grandfather will be very proud of what she and her banksta cronies have finally achieved when it is all over.

Hedge accordingly.

TwoShortPlanks's picture

Hope you're not inferring I'm a yank?!

tellsometruth's picture

Thank you Zerohedge and community here for keeping me in the know... I am grateful

bankruptcylawyer's picture

first there were real wars,

then there were trade wars,

then there were currency wars,

then there were ratings' wars.


i rate you the loser. loser. you lose. THWACK!

slewie the pi-rat's picture

brilliant!  i think U have enumerated the derivatives of war.  let us bundle them into securities and sell as a cross-tranche package called Plan For Peace.  we can sell default swaps and call them War On Evil.  we'll never pay a cent, b/c if the Plan For Peace fails all the way up to the Real War, we can hire a bankruptcy lawyer and claim we were freaking wiped out by an act of war!

nathan1234's picture

Basically a game being played out.

And if Dagong downgrades does China sell off us Treasuries?

China has no choice. It knows it too.

It is spreading the moolah all around in Africa, Europe and Asia in the hope that al least some of this debt will stick and have value.


Urban Redneck's picture

The Chinese non-first-world money comes with myriad strings in terms of political influence, market and resource access, and pricing guarantees.

The Eurozone has complained about the Big 3 ratings agencies for years (regardless of their domicile- they are tools of the US Government and NY TBTF banks).  They set up a "framework" for the EU, but otherwise the effort appears to be all ivory tower talk and intellectual bullshit  (their powerpoint pimps do occasionaly come up with new product). 

Kabuki theater gets real when the smaller European players and Dagong step up and into bed with the bitches in Brussels and move the ECB and and its ICSDs to a viable non-big-3 model.  Then we get the FED-DTCC v ECB-Euroclear/Clearstream grudge match for influence over the bankers and the division of their loyalties. 

nathan1234's picture

The Fed's real owners are in Europe. Those who think the fed has US interests at heart are bonkers IMHO.

Urban Redneck's picture

The FED's interests are the interests of the US banks.

AUD's picture

The fundamental problem is that the US' ability to generate wealth is far from compensating its increasing debt, and "paying debts by borrowing more is not a solution," he said.

This is just stupid, the US has been borrowing more to pay its debt since 1971 & the Chinese have been buying US debt the whole time.

What a bunch of fucking idiots.

tim73's picture

Hey Yanks, thanks for trying to throw us Europeans under the bus. BTW, did you notice the leash attached to your legs and that incoming truck behind you? :)

Mr Lennon Hendrix's picture

The CFR/CNP hotline is open, please give them a "ring" to place your complaints.  Thank you.

janus's picture

Okay, i really feel I'm getting a handle.  When learning any subject, I knew I was getting the rhythm when the ancillary questions that arose from understanding were soon answered by the author (granted, of course, that you're reading the right author)...in this case, just as I was wondering how this would affect the peg, bip!, a quick left jab to the eye...and, Mr. Durden, after hatching my own thoughts on the matter, I reckon you're right...or in this case left (that was cheesy, couldn't help it). 

"she's my daughter and my sister..."

AldousHuxley's picture



23 Things They Don't Tell You About Capitalism

Thing 1: free market doesn't exist;  NAFTA is 1000s pages long when free market should make it just 1 page. free market means child labor. etc.

Intellectuals are leading the new paradigm

Mr Lennon Hendrix's picture

Imbred intellectuals, like, [cough] Aldous Huxley.

AldousHuxley's picture

yes attack intellect. and support corruption. Chinese and Saudis love stupid slaves they now own. I hope you don't have children.