Chinese Rating Agency Downgrades US To AA+ Citing High Inflation, Debt Ceiling

While Fitch, Moodys and DBRS have all threatened to do what S&P boldly did in 2011 and downgrade the US should the debt ceiling crisis lead to a technical default, China's leading rating agency, China Chengxin International Credit Rating decided not to wait, and on Friday downgraded the US’ rating by one notch, to AA+ from AAA, citing high inflation and the widely watched debt-ceiling stand-off.

“The intensification of political divisions between the two parties in the United States has increased the difficulty of resolving the debt-ceiling issue,” CCXI said in an online statement. It added that the political wrangling was likely to result in a delayed payment by the so-called X-date – the day the US government says it can no longer fulfil all its financial obligations. Apparently it was unaware that spineless GOP leadership was only pretending it is seeking a compromise, and instead spending will be "cut" by a laughable 0.2% of GDP at most, at which point everyone will call it a day and pat themselves on the back.

“Deterioration in fiscal strength and frequent breaches of the debt ceiling continue to erode the credit base of the US dollar,” it added, according to SCMP.

A downgrade by a Chinese agency is symbolic and while it may represent worries among Chinese market players, it will not have a substantial impact on US borrowing costs.

This is the first time a Chinese institution has explicitly expressed worries on the US debt issues, but there has been no official response from Beijing, which slashed its holding of US Treasury bills by a total of US$143.9 billion, or 14.2%, in the past year up to March.

CCXI, which placed the rating on review for a further downgrade, said the US debt sustainability is being challenged by its highest level of debt among the previously AAAg-rated countries, with debt being compounded by the US Federal Reserve’s continued interest rate hikes.

The collapse of Silicon Valley Bank in March further added to the challenges facing the Fed’s policy path while increasing economic volatility, CCXI added.

The X-date could arrive as early as Thursday, with US Treasury Secretary Janet Yellen warning again on Monday that the US could be at risk of defaulting on its national debt for the first time ever if timely measures are not taken.

On Wednesday, Fitch put the US on notice for a possible credit downgrade, pointing to the debt-level “brinkmanship” in political negotiations to raise the debt ceiling.

On Thursday, Moody’s said that a mid-June payment of interest on Treasuries will be critical for maintaining the top, AAA grade. On June 15, the Treasury Department is due for about $2 billion in interest payments. Treasury Secretary Janet Yellen warned Sunday on NBC that “the odds of reaching June 15th, while being able to pay all of our bills, is quite low” if Congress doesn’t raise the debt limit.

“That’s a really important date for us,” William Foster, a senior vice president at Moody’s, said in an interview Wednesday. While the interest payment is relatively small, “if it was missed, that’s a default. We’d downgrade the rating by one notch from AAA to AA1,” he said.

Foster emphasized that Moody’s does anticipate that Congress and the White House will strike a deal to raise or suspend the debt limit before the Treasury exhausts its special accounting measures to keep within the ceiling. Yellen has advised the Treasury risks running out of cash as soon as June 1.

The AAA rating at Moody’s wouldn’t be restored unless Congress overhauled the current debt-limit legislation, according to Moody’s.

“At that point, the debt limit is no longer a frustration of fiscal policymaking that leads to brinksmanship – it resulted in a default,” Foster said. “And we’d need to reflect that permanently in the rating. To bring it back to AAA, there would have to be significant reform of the debt-limit rule so that it’s no longer a material risk to default” going forward — or axing the rule, he said.

For Moody’s, the key issue is whether the Treasury — if it does go past the so-called X-date when it runs out of sufficient cash — keeps up with its servicing of Treasury securities.

“We consider a default to be a missed interest or principal payment,” Foster said. After a downgrade following any June 15 failure to pay interest, the firm “would keep the rating under review for further downgrade until the default is cured.”