China's fledgling credit ratings agencies may be just the thing to help reform the world's sovereign credit agencies.
(Ecns.cn)--Despite the recent success of America's politicians in negotiating a raise in the US government's debt ceiling, thereby avoiding a historic default and a reduction in the US's AAA credit rating, one ratings agency has already begun making moves towards downgrading the United State's credit rating. Dagong Global Credit Rating Co (Dagong Global), a Chinese credit rating agency based out of Beijing, announced that it will be lowering the US's sovereign credit rating, although it has not yet determined the extent to which its US credit rating will be downgraded. Speaking in an interview with Reuters last week, Guan Jianzhong, chairman of Dagong Global, told reporters that his agency "will definitely cut the rating, regardless whether there will be a compromise."[1]
Although the move represents a significant breach with Moody's, Standard and Poor's, and Fitch, the three major credit rating agencies that more or less monopolize the global sovereign credit ratings market, it is in fact only the latest in a string of steps taken by Dagong Global calling into question the ability of the United States' government to repay her creditors. Last November, Dagong Global downgraded the US's credit rating from AA (the same rating it had awarded the Chinese government at that time) to A, ranking it with the likes of Estonia, Malaysia, and Brazil. And, in mid-July, Dagong Global placed the US's A rating under review, citing America's tremendous debt burden over the next several years and deteriorating fiscal situation as justification for the decision.
Moody's Crisis
Although Dagong Global's influence as a ratings agency remains limited in comparison with the major Western agencies, the attention it has received since its downgrading of the US's credit rating is unsurprising in light of the criticism received by the credit ratings industry over the last several years. The US Financial Crisis Inquiry Commission's 2011 report, for example, called the industry "key enablers" of the 2008 subprime mortgage crisis and the financial meltdown that followed after it was found that the agencies had given AAA ratings (the same rating given to US government bonds), to financial products bundled with large quantities of subprime mortgages. In a subsequent investigation by the US's Securities and Exchange Commission, the agencies were criticized for excessive communication with their customers, lack of transparency, and lack of competitiveness, with some even being accused of advising their customers of what sort of financial products to produce in order to receive higher ratings.[2]
America's credit rating agencies have received similar criticism in Europe, where EU officials came to similar conclusions in an investigation following the subprime mortgage crisis and even went so far as to call for the creation of a European sovereign ratings agency to act as their replacement. Critics have blamed the agencies for contributing to the ongoing risk of breakup in the euro zone as recent ratings downgrades of periphery nations such as Greece, Spain, Italy, and Ireland have led to ever-increasing interest rates for sovereign bonds and prompted Jose Manuel Barroso, the European Commission President, to accuse the agencies of anti-European bias.[3]
