Since all US rating agencies (Fitch is majority French-owned) have been terrified into submission and will never again touch the rating of the US following the DoJ's witch hunt of S&P, any US rating changes on the margin will come from abroad. Like China's Dagong rating agency, which several hours ago just downgraded the US from A to A-, maintaining its negative outlook.
The agency said that while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged. "Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."
Among the other Dagong zingers:
▪ The partial US federal government shutdown apparently highlights the deterioration of the government's solvency, pushing the sovereign debts into a crisis status.
▪ Since the outbreak of the US debt crisis in 2008, the deviation between the federal government's sources of debt repayments and the country's real wealth creation capacity has been constantly broadened. The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term. The federal government debt stock increased by 60.7% between 2008 and 2012 when the nominal GDP increased by only 8.5% while the fiscal income decreased by 2.9%, which indicates that fiscal income is losing its means as the primary source of debt repayments.
▪ Liquidity has been continuously injected into international financial markets from the US, which indirectly plays a key role in combating against the risk of government default. This implicit debt default behavior infringes upon the benefits of creditors.
▪ The debt ceiling has been extended continually, increasing the total amount of the federal government debts. In order to avoid the sovereign debt default, it becomes an inevitable choice for the US government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government's solvency.
▪ The Democrats and the Republicans of US do not have a consistent strategy target to solving the sovereign debt problem.
To be sure a Chinese rating agency is just that, Chinese, and its opinions are rooted in nationalistic pride as much as S&P and Moody's AAA take on the housing bubble in 2005-2007 were rooted in mathematical logic, but the implications of this latest shot across the bow by the country which last weekend said the time has come to strip the dollar of its reserve currency status, are clear. And, at its core, Dagong is correct: because all the US really has done is kick the can for another three months, something the domestic rating agencies would also admit if they were not terrified of expressing the truth.
READ FULL SOURCE ARTICLE: 10/17/2013
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