China Downgrades US Credit Rating From A- To BBB+, Warns US Insolvency Would "Detonate Next Crisis"

In its latest reminder that China is a (for now) happy holder of some $1.2 trillion in US Treasurys, Chinese credit rating agency Dagong downgraded US sovereign ratings from A- to BBB+ overnight, citing "deficiencies in US political ecology" and tax cuts that "directly reduce the federal government's sources of debt repayment" weakening the base of the government's debt repayment.

Oh, and just to make sure the message is heard loud and clear, the ratings, which are now level with those of Peru, Colombia and Turkmenistan on the Beijing-based agency’s scale of creditworthiness, have also been put on a negative outlook.

In a statement on Tuesday, Dagong warned that the United States’ increasing reliance on debt to drive development would erode its solvency. Quoted by Reuters, Dagong made specific reference to President Donald Trump’s tax package, which is estimated to add $1.4 trillion over a decade to the $20 trillion national debt burden.

“Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track,” Dagong said adding that "Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weaken the base of government’s debt repayment."

Projecting US funding needs in the coming years, Dagong said a deterioration in the government’s fiscal revenue-to-debt ratio to 12.1% in 2022 from 14.9% and 14.2% in 2018 and 2019, respectively, would demand frequent increases in the government’s debt ceiling.

“The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis,” the Chinese ratings firm said.

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In a preemptive shot across the bow in the coming trade wars, last week Bloomberg reported that Beijing officials reviewing China’s vast foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds. That warning spooked investors worried that sharp swings in China’s massive holdings of U.S. Treasuries would trigger a selloff in bond and equity markets globally. The report sent U.S. Treasury yields to 10-month highs and the dollar lower, although China’s foreign exchange regulator has since dismissed the report as "fake news."

Still, Dagong was quick to point out that not much would be needed to crush the public's confidence in the value of US Treasurys:

The market’s reversing recognition of the value of U.S. Treasury bonds and U.S. dollar will be a powerful force in destroying the fragile debt chain of the federal government,” Dagong said.

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To be sure, China's move is far more political than objectively economic, and is meant to send another shot across the bow as the Trump administration prepares to launch a trade war with Beijing in the coming weeks. Still, while both Fitch and Moody’s give the United States their top AAA ratings (and the S&P is the only agency to infamously downgrade the US to AA+ in 2011), US raters have also expressed concerns similar to Dagong‘s. From Reuters:

S&P Global said last month’s proposed U.S. tax cuts would increase the federal deficit and looser fiscal policy could prompt negative action on U.S. credit ratings if Washington failed to address long-term fiscal issues.

In November, Fitch said the tax cuts would give a short-lived boost to the economy, but add significantly to the federal debt burden. It warned that the United States was the most indebted AAA-rated country and ran the loosest fiscal policies.

Moody’s said in September any missed debt payment as a result of disagreement over lifting the debt ceiling, a perennial point of partisan contention in Washington, would result in the United States losing its top-notch rating.

China is rated A+ by S&P Global and Fitch and A1 by Moody‘s, with the three agencies citing risks mainly related to corporate debt, which is estimated at 1.6 times the size of the economy and mostly attributed to state-owned firms. 

Comments

anarchitect eclectic syncretist Tue, 01/16/2018 - 08:18 Permalink

Yes, when the issuer can print to avoid default, what does a rating mean?  It's hard to imagine a default in that situation, because it would affect banks, pension funds, and so on.  The rating should therefore take dilution into account, no different that a rating for a stock whose firm is likely to issue more paper.  In that case, BBB+ is probably generous, but compared to what?  Holders of bonds denominated the currency that is likely to be diluted face much the same risk, which means that corporate bond ratings should also reflect that risk, and not merely the risk of default.  I guess, though, that you can derive the risk by "multiplying" the corporate bond rating by the rating for the sovereign bonds denominated in the same currency.

In reply to by eclectic syncretist

jeff montanye anarchitect Tue, 01/16/2018 - 08:21 Permalink

did i miss something? can't argentina and zimbabwe print more of their currencies too? this is all based on winning world war 2 and having the world reserve currency. when the gold hits the fan and the chinese pull down the u.s. pants revealing the tiny shriveled dick it is left with, that world reserve status will be no more.

off you go to the dollar store while you can.

In reply to by anarchitect

NoDebt jeff montanye Tue, 01/16/2018 - 09:15 Permalink

Couple things here....

1.  Our debt is denominated in our own currency, unlike 3rd world shitholes that borrow in a currency other than their own.

2.  China's debt levels aren't as out of control as our own?  A bit of the pot calling the kettle black here, I think.  When this bitch detonates it won't matter where it starts.  US, China, Japan, Europe... it will be everywhere within a couple weeks no matter where it starts.

 

In reply to by jeff montanye

YUNOSELL auricle Tue, 01/16/2018 - 10:49 Permalink

The simple fact here is that the monetary system is broken -- we NEED to have sound money again that people can trust the value and that that value won't decrease over time. With all this fake money printing in constant QE and market manipulation the goal posts are always changing and trust is continually eroding.

And to be honest, China seems to be the only one wanting to do anything about this possibly going back to a stable gold standard (I hope this is the case), as USA seems Hell-bent on maintaining their World Reserve Petrodollar and the exorbitant privilege that comes with that, at the expense of every other country.

In reply to by auricle

Perimetr YUNOSELL Tue, 01/16/2018 - 11:12 Permalink

Don't worry!

The banksters are setting up all new, improved CRYPTOCURRENCIES that will replace the current system!

This will fix everything, just ask them! Plus they can absolutely control everyone's "money".

Of course, the new USCRYPTO, EUROCRYPTO, etc, will be BACKED BY NOTHING

one little problem there, China and Russia may not accept them in exchange for goods and services . . .

In reply to by YUNOSELL

popeye NormanConquest01 Tue, 01/16/2018 - 12:37 Permalink

Oh I don't know, the USD is backed by whatever assets the US federal government owns - some nice real estate in Nevada, embassies in good neighbourhoods and suchlike.

Dagong doesn't say anything new, and its obvious an organisation printing large annual deficits is not going improve matters by further reducing revenue.

If Trump truly wanted to boost US domestic consumption Keynes style, he would divert military (and paramilitary) spending in far off lands to federal spending within the continental US.

The fact he does not do that reveals the real purpose of the tax cuts: to further support US shareholders (those that can afford shares).

In reply to by NormanConquest01

D503 popeye Tue, 01/16/2018 - 18:25 Permalink

The US dollar is backed by the ability to point the biggest gun at anyone who won't use the dollar. 

China has forgotten what happens when the advanced western world finally goes berserk and stops dicking around pretending to fight wars with both hands and a foot tied behind their back as they exploit the indigenous peoples of shithole volume LXXVI. 

Ultimately our economies aren't run on money anymore. They are run on fuel. No one is printing that.

In reply to by popeye

popeye D503 Wed, 01/17/2018 - 05:00 Permalink

"advanced western world" - in your view, in what respect is the western world "advanced", pray tell? To my mind the assertion that the "western world" is advanced is a quaint reminiscence, and really the phrase "western world" is just a euphemism for "white European dominated world". A few other adjectives come to mind.

Yes, the USA likes showing off its big gun, but I suspect the Chinese have decided size doesn't matter.

Economies have for millenia run on resources, not money; the fiat paper experiment is a very recent creation.

In reply to by D503

Kayman NoDebt Tue, 01/16/2018 - 10:11 Permalink

China pegs its puny Yuan to the USD. If the USD is "insolvent" then so is China by definition.

Fucking Chicoms don't even know not to shit where they eat.

Let the Yuan float you fucking cowards.  Tie it to physical gold and get DeGaulled ! Bunch of stupid, belligerent fucks.

In reply to by NoDebt

Socratic Dog NoDebt Tue, 01/16/2018 - 11:18 Permalink

Sure US debt is denominated in $US.  And it will continue to be, so long as foreigners accept it in exchange for their goods.  You know, oil 'n shit.  But when that peg falls, the US falls.  And China, if this article is true, is very close to cutting that peg.

Only two alternatives then.  Zimbabwefication, or war.

In reply to by NoDebt

Simplifiedfrisbee NoDebt Tue, 01/16/2018 - 12:34 Permalink

This means that insolvency will be entirely denominated in US dollar value. So assets will be priced in a new currency faster that Don can type on twitter.

The global economy flows like a river. It will seek supply chains and resources with the least amount of friction. The move to a new global economy will be a swift transition. But with Nuclear Don at the helm boasting about his deep ties to the deep state, he will fuck the world with radiation before he accepts that he is the biggest liar since Nixon.   

So trumptards, continue to buy stocks and crypto currencies and sell ALL your precious metals. The smart money has long left this shit hole of a market and we need more idiots who believe the economy is booming. 

In reply to by NoDebt

Lex_Luthor sabaj49 Tue, 01/16/2018 - 09:40 Permalink

At least China owns several trillion dollars of foreign reserves. A bit unlikely that China defaults against foreigners due to huge fx reserves and giant trade surpluses. China's debt is mostly internal. They own to themselves since they printed all that currency. They are 'fixing' this problem through domestic inflation. USA on the other hand will be in dire straits if nobody takes the dollar anymore. They have no reserves, huge trade deficits, enormous expenses and probably no more gold. Check mate.

In reply to by sabaj49

Retired Guy Kayman Tue, 01/16/2018 - 11:23 Permalink

Bring the jobs back with rising minimum wages? Don't forget EPA, OSHA, etc. Don't forget their workers have experience making things while our experienced people haven't been making things for a long time. Don't forget the NIMBY, not in my back yard, activism. The jobs left for good reasons and will not come back without massive mental and legal changes. Lots of luck with that.

In reply to by Kayman

MK13 eclectic syncretist Tue, 01/16/2018 - 09:10 Permalink

We've entered an era of currency cold wars.

China is selling treasuries while banging the pot - because they are preventing a dollar spike from offshore $ coming back home. Meanwhile if Chiba manages to shake up us treasury markets, it occupies trump administration's time from trade wars.

And anyone who thinks china isn't in deep doodoo with its internal debt - because commies allocate so much better than capitalists -I've got a beach front property in AZ to sell you.

The difference between 2 years ago and now is - nations are trying to screw others for minor political or economic gains, quiet globalist cooperation 2 years ago.   

 

In reply to by eclectic syncretist

Endgame Napoleon MK13 Tue, 01/16/2018 - 20:41 Permalink

But, two years ago, it was globalist cronies, doing things that primarily benefit a few, while the American middle class sank in the quick sand. I am not saying that the middle class is not still largely sinking, with womb-productive citizens and immigrants buoyed by more rigging of an underemployed labor market with monthly welfare and refundable child tax credits.

In reply to by MK13