What Do China And The United States Have In Common?

From The Daily Capitalist

The answer to the question is that both countries have been given credit watch warnings by credit rating agencies.

Moody's issued this warning about the U.S.:

The US needs to make significant government spending cuts or else risk losing its gold-plated credit rating that has made extensive borrowing so affordable, Moody’s Investor Service said late Monday.

The announcement was a sobering warning that the country’s burgeoning debt has weakened the country’s economic standing, and that US Treasury Bonds, traditionally a bullet-proof investment, could lose their sterling Aaa-rating if Washington cannot control its federal debt.

If Moody’s were to downgrade the country’s rating, the impact could be severe. It would signal to lenders worldwide that the US is no longer one of the safest places to invest money.

That, in turn, would threaten the country’s ability to borrow freely and extensively from other countries on favorable terms. Investors would likely demand a higher interest rate to finance US debt, which would push federal debt higher still. ...

“The ratings of all Aaa governments are currently well positioned despite their stretched finances,” Moody’s quarterly Sovereign Monitor reported.

Although it hasn’t yet taken any action to downgrade US ratings, Moody’s announcement will likely rattle investors and decrease investor confidence in US bonds. ...

"At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," Mr. Cailleteau said in the report.

In it’s report, Moody’s said debt levels in the US were to blame for its threatened economic standing. ...

The Obama administration estimates US deficit (the difference between how much money a government takes in and how much it spends) will rise to 10.6 percent of GDP this year, the highest level since 1946. Federal debt (money the government owes lenders) will likely reach 64 percent of GDP.

The US can straighten up its balance sheet – for example, raising taxes and cutting spending – to stave off a downgrade, says Moody’s.

“A key issue is whether governments are able and willing to implement such unprecedented adjustments,” said Mr. Cailleteau, in a statement.

I look in my crystal ball and I see ... VAT. See here, here, and here.

Then Standard & Poor's took a shot at China:

A potential spike in bad debts as a result of a government-backed lending surge is likely to be the biggest challenge for China's banks in the next few years, but lenders should be able to keep the problem at a "manageable level," Standard & Poor's Ratings Services said Thursday.

The report is the latest analysis to raise the prospect of a significant rise in nonperforming loans. China's banks—almost entirely state-controlled—lent a net total of $1.4 trillion in 2009, about double the volume in 2008. Fitch Ratings warned throughout 2009 that the spike in new loans could result in declining asset quality at banks. In February, it lowered its ratings on two mid-sized Chinese lenders, in part because of their loan growth in 2009.

Much of the concern centers on indirect borrowing by local governments. Barred from borrowing directly from banks, cities, counties and provinces set up investment vehicles which the banks lent to instead. These loans helped finance a wave of public construction last year, keeping China's economy buoyant during the financial crisis.

But the finances of many local governments were already weak prior to the downturn. Analysts say the indirect borrowing raises the specter of rising bad debt if the governments can't find the cash to repay their loans. Central government regulators in recent months have tightened supervision of such indirect borrowing.

Estimates vary about of the amount of debt accumulated by local government investment vehicles. Victor Shih, a professor at Northwestern University who has researched the issue, estimates it could be as large as 11 trillion yuan, or about $1.6 trillion. Chinese media reports have cited an estimate of about six trillion yuan.

S&P said in its report that it expects the ratio of nonperforming and other "problem" loans in China's banking system to stay below 10% at least until 2012. China's banks had a total nonperforming-loan ratio of 1.58% at the end of 2009. ...

"The earnings of Chinese banks may deteriorate and capitalization levels could moderate over the next two to three years as a significant rise in credit losses stemming from new loans starts to emerge," said the S&P report, which Mr. Tsang co-authored. "But we don't expect the banks' financial metrics to weaken enough to change our ratings"

Of course we already know that (see, China’s Fragile Economy, Its Housing Bubble, and What It Means To Us).

Comments

[SteveNYC]

What about the communist part?

[Shameful]

The VAT should be fun.  Have both sides of the Big Government party pushing for it.  When in doubt tax it out!  But really we know don't need it to secure the AAA rating.  There is way to much political pressure for them to downgrade us any time soon.  But that same political pressure could be used for a China downgrade.  Seems like we have the opening shots of a conflict with China, squabbing about trade and currencies.

Will say calling China out to revalue the Renminbi was genius.  Now they can't because it will look like they are giving in to America's slap in the face demands.  And this is Asia they have to save face.  So if they continue the peg it provides support for the dollar, which is good for our bonds.  Normally not wise to insult the guy keeping you afloat but this case it looks good in the short term.