http://www.dagongcredit.com/dagongweb/english/pr/show.php?id=102&table=web_e_zxzx
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to
as "Dagong") initially assigned the United States sovereign credit a
rating of AA in July 2010. On November 3, 2010, the U.S. Federal
Reserve announced the QE2 monetary policy, which aimed at stimulating
the U.S. economy through issuing an excessive amount of U.S. dollars.
Dagong saw this action as a sign of the collapse of the U.S.
government's ability to repay its debt and the drastic decline of its
intention to repay, and therefore downgraded the U.S.' credit rating
to A+/negative on November 9, 2010. This surveillance research
confirmed the opinion that the U.S. government's actual ability to
repay its debt would tend to continuously decline, as Dagong stated
in the last rating report. Therefore, Dagong puts both local and
foreign currency sovereign credit rating of the United States on the
Negative Watch List for the following reasons:
1. The U.S. ideas and policies on state-management and economy,
which violate the development patterns of credit economic society,
will result in a long-term recession of its economy. The national
policy of expanding the social credit demand to satisfy the capital
expansion and consumption demand that the U.S. government has adopted
for a long time as well as the mismatched development of the
financial industry makes them the origin of the bubble economy and
credit crisis; the industrial hallowing-out deprives the country of
the wealth creation capability that supports its huge amount of
debts; the global strategy becomes the driving force for increasingly
additional debts; under its long-standing deficit policy, the federal
government keeps increasing its debt ceiling; that it is difficult
for the U.S. to repay its gigantic debts via self-created wealth
causes the U.S. to resort to abnormal means to export debts. Though
the Obama administration has realized the fore-said problems and
begun to reform the economic growth model and cut the government
deficit, yet the current political regime, long-standing economic
features and the fact of insufficient financial resources will make
it difficult for the reform to be effective in the short to medium
term. The continuous economic recession in the U.S. triggered by the
government's insufficient economic management capability has shaken
the economic basis of its national solvency.
2. There is a lack of endogenous driving force in the U.S.
economy, which highlighted the insufficiency of the U.S. capability
to create real wealth, and when the U.S. government is forced to
tighten up its monetary and financial policy, the U.S. economy will
slow down in the next two years. The 2.9% real economic growth in
2010 was largely attributable to the favorable monetary and financial
policy, and the efficiencies of the U.S. primary industries are still
low. The unemployment rate, as high as 9.5%, together with the
ever-declining real estate market, has suppressed the domestic demand
of consumption and investment in the U.S.. Influenced by the rising
pressure of inflation and the worsening financial status, the
government will have to tighten up its monetary and financial
policies, which in turn will remove the stimulating effects on the
economy. In addition, the turmoil in the Middle East and North
Africa, the Great East Japan Earthquake, and the EU sovereign debt
crisis all have a negative impact on the U.S. economy. Therefore,
Dagong predicts that the GDP growth of the U.S. economy in 2011 and
2012 will slow down to 2.5%.
3. The extremely low level of interest rate and the preference
for risky investment that was encouraged by the quantitative easing
policy will allow the U.S. continue its development model which
relied heavily on virtual economy, which also increases the
possibility of another financial crisis like the onethat happened in
2008. Since the U.S. adopted the quantitative easing policy, its
financial industry has been growing at a speed largely disconnected
from its real economy. The recent statistics showed that the issuance
of high-yield speculative grade corporate debt and mortgage-backed
securities have increased greatly, and the trading in venture capital
funds has been very active. In the meantime, the shift of the economy
development model from credit driven to investment and export driven
will be restricted by lack of fund and technology. So the U.S. will
continue to focus its development on virtual economy, while the real
economy will remain in difficulty.
4. The financial tightening is unlikely to actually happen, and
the budget deficits will remain as high as 10% in the next two years.
The financial tightening proposed by the Obama administration showed
a strong will to solve the U.S. budget deficits problem, but the
current U.S. economy cannot provide powerful enough support for this
tightening, so its target probably will not be realized. In terms of
fiscal income, the tax reduction policies will maintain the income at
a level of about 16% of GDP; and real life politics and the financial
situation limited the room for future tax increase. As for fiscal
expenditure, given the U.S. global military strategy and its aging
population, it is difficult to cut expenses on military, social
security and medical care, and the budget deficits will remain high.
Even in the middle term, the deficits will be no lower than 5%.
5. To compensate for the deficits, the government debt
obligation will continue to rise, which is unlikely to fall before
2015. Assuming that the upper limit for debt can be raised in time,
Dagong makes predictions about the situation of budget deficits and
economy growth in the next five years, and gives conclusions in cases
of normal, good and bad prosperity. In each of these three cases, the
debt load of the federal government will keep rising, and will reach
117%, 105% and 124% respectively. In order to satisfy these financing
needs, the upper limit of debt for the federal government will have
to be raised $ 5.5 trillion in case of normal prosperity, and still $
4 trillion in case of good prosperity. If the limit is not raised in
time, the U.S. government will be unable to repay the debt maturing
in August and therefore will default.
6. The government will continue its practice of borrowing new
money to repay the old debt, but the rising dependency on debt, the
relatively large need for funds and investors' concern over the U.S.
financial and economic situation all undermine its financing
attractiveness. In 2010, the U.S. government' dependency on debt is
as high as 39.9%, substantially higher than the 8.7% average level of
the ten years before 2008; in the first half of the fiscal year 2011,
this figure has climbed to 44.8%, reflecting a deterioration of the
government financial position and a huge challenge to the
sustainability of its future financing. In the next three years, the
amount of U.S. debt that will mature is $ 3 trillion, $ 1.5 trillion
and $ 1.3 trillion respectively. All these debts will need to be
refinanced on the market. The primary buyers of U.S. debts, the Fed
and international investor, will have a stable demand in the short
term, but the high financial deficits and debt dependency create a
large departure between the risks of U.S. national debt and its
extremely low return. Worsening of the economy and financial
situation will shake investors' confidence. As the reform in the
international monetary system goes, the asset denominated in dollars
will depreciate, another challenge to the sustainability of the U.S.
government's future financing. Once the financing cost of the U.S.
government shot up, then a QE3 by the Fed is inevitable, which will
endanger the government's ability and willingness to repay the debts.
In sum, Dagong concludes that the fundamental aspect of the U.S.
economy and financial health can still support its current rating,
but factors including the slowdown of growth, the high financial
deficits and rising of debt dependency place the U.S. actual ability
and intention to repay its debts on a descending track. Dagong will
look closely at any change in the U.S. economy, finance and
government budget. If during the surveillance period there is no
significant event that substantially improves U.S. ability and
intention to repay debts, Dagong will downgrade the sovereign credit
of the United States to an appropriate level.
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