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

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.