China Dagong agency downgrades US credit rating from A+ to A with negative outlook

Aug3,2011 - |sourced UTC

Chinese rating agency Dagong Global Credit Rating Co. said Wednesday it has cut the credit rating of the United States from A+ to A with a negative outlook after the U.S. federal government announced that the country's debt limit would be increased.

“The decision to lift the debt ceiling will not change the fact that the US national debt growth has outpaced that of its overall economy and fiscal revenue, which will lead to a decline in its debt-paying ability”, said Dagong Global in a statement.

The downgrade is a result of fights between U.S. political parties over debt issues, which reflects the government's inability to completely solve the debt problem, said Dagong Global.

“The interests of the country's creditors are short of systematic protection both politically and economically” underlined Dagong.

China is by far the largest foreign holder of US debt, with holdings amounting to 1.15 trillion U.S. dollars as of the end of April.

Dagong announced last month that it had put the U.S. credit rating on negative watch for a possible downgrade on expectations of a long-term economic recession in the world's largest economy, partially caused by its economic governance and policies.

Dagong downgraded the U.S. rating from AA to A+ in November of last year after the US government announced a second round of quantitative easing.

The agency said the approval to raise the debt ceiling indicated that there will not be any positive changes in factors that will influence the country's debt-paying ability in the long run.

The growth of the US new debts has so far outpaced the rate at which it reduces its fiscal deficit, as there are not reliable or feasible policies put in place to support the country's plan to cut federal spending, it said.

Dagong estimated that the United States has to reduce no less than 4 trillion dollars in its fiscal deficit in the coming five years to sustain its liability scale.

The federal government's 2.4 trillion dollars reduction plan reflects its unwillingness and inability to cut its deficit and reduce debt, which in turn leads to the country's current credit rating, it said.

“The decline in the federal government's debt-paying ability is irreversible,” said the company, adding that the US Congress has not found a constructive way to increase the country's economic growth.

The agency forecast last month that the US economic expansion will slow to 2.5% annually for 2011 and 2012, with monetary and fiscal policies being forced to tighten and drivers of inner growth remaining weak.

Credit rating agency Moody's also put the U.S. AAA credit rating under review for a potential downgrade last month on rising tensions over the country's borrowing limit.