China ratings firm Dagong in US downgrade warning

PUBLISHED : Tuesday, 03 December, 2013, 5:45am
UPDATED : Tuesday, 03 December, 2013, 5:45am

The United States may see further sovereign rating downgrades if it fails to improve its debt-service capability, although a near-term cut looks unlikely, the head of mainland credit-rating firm Dagong said.

Beijing-based Dagong Global Credit Rating grabbed the media spotlight in October when it cut its US rating by one notch to A-minus from A, despite a deal in Congress to raise the federal government's borrowing ceiling.

"Our rating could be effective for some time. We won't cut the rating at will," Guan Jianzhong, chairman of Dagong, said. "We are very worried about the US economy. The federal government hasn't unveiled any strategic measures to fundamentally resolve the [debt] problem."

Guan did not say how far the US rating could be cut, but did cite an earlier prediction by an unnamed American analyst that Dagong could slash the rating to B by 2020. "We don't hope this will happen," he said. "But I think the trend of rating cuts does exist if the US debt level continues to rise and its economic fundamentals don't improve."

The Obama administration may be able to raise the debt ceiling again in February, but Washington must find ways to revive growth in the world's largest economy and boost fiscal revenues to fundamentally shore up its debt-service capacity, he said.

Dagong sparked controversy in July 2010 when it commenced its sovereign rating research by giving the US a rating of AA for local and foreign currency debt - lower than the mainland's AA+ for yuan debt and AAA for its foreign currency debt, which have remained unchanged.

It downgraded the US rating on concerns over quantitative easing in November 2010, and cut again in August 2011.

Dagong's ratings are barely watched outside the mainland, and major international credit agencies classify most countries very differently.

In a rare move earlier this year, Dagong downgraded bonds issued by three financing vehicles wholly owned by cities in the provinces of Jilin, Hubei and Jiangxi. "That was a warning sign on local debt," he said. "Their debt payment ability declined and we saw no sign of any quick recovery,"

Guan said Dagong had paid a price for breaking ranks with local rivals, losing some clients in a highly competitive market.

Most local financing firms are set up by local governments to borrow funds to finance investment projects. Domestic corporate debt defaults are rare with banks or the government stepping in to cover potential losses if a firm gets into trouble.

Guan said the chances of debt defaults by mainland provinces and cities remain slim because Beijing may bail them out, despite growing market fears that slower economic growth could push some to the brink.

"A default could be disastrous," he said. "Other local governments may help and the central government will not allow it to default."