Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) downgraded the local and foreign currency sovereign credit ratings of the United States of America (hereinafter referred to as “U.S.”) from A+ to A, and each with a negative outlook on August 2, 2011. According to the changes in the situation during the surveillance period, Dagong has decided to put the sovereign credit ratings of the U.S. on Negative Watch List. The main reasons are as follows:
1. The political conflict and the defect in national debt management have pushed the creditworthiness of the federal government to the cliff again. After the U.S. federal government debt limit crisis caused by the partisan quarrels in August 2011, it has evolved into the current fiscal cliff and debt limit crisis due to the same reason. It once again highlights that the decline of the U.S. federal government’s capacity in interest integration and decision-making is the political reason of the weakened solvency. On the problem of how to tackle the national debt crisis, each political party insists on the proposition favorable for its own interest. Therefore, it is difficult to form a long-term consensus on solving the debt problem ultimately, which leads to the unceasingly fiscal deterioration of the government.
2. With no fundamental plan and measures of ameliorating the solvency in place, the U.S. government is lacking the willingness of debt repayment, and the depreciation of debt outstanding through debt monetization has already indicated a trend of implicit default. Increasing fiscal revenue, cutting fiscal expenditure and reducing the scale of debt are the ultimate ways to improve the government indebtedness, but the U.S. government, instead of adopting effective measures to improve its indebtedness, came out with two consecutive rounds of Quantitative Easing over the year in order to realize internal circulation of government debt and sustain its solvency through monetization. The continuous credit expansion to maintain its consumption through borrowing by taking advantage of the status of the U.S. dollar without touching on the ultimate issue on solvency manifests the lack of willingness to repay. The creditors have been suffering real losses from the consequent persistent devaluation in the debt outstanding, and the U.S. government has shown a trend of implicit default on its debt.
3. The deterioration in the main factors impacting on the federal government solvency has further widened the degree of deviation between the debt repayment sources and the real wealth creation capability. The wealth creation capability is the ultimate source of debt repayment and the greater the debt repayment sources deviate from the wealth creation capability the larger the risks. The debt burden of the federal government increased 9.1% and 11.7% on year-on-year basis in 2011 and 2012 respectively, far exceeding the nominal GDP growth rate of 3.9% and 3.4% as well as fiscal revenue growth rate of 4.9% and 6.2% over the same period. The debt outstanding of the federal government has risen by 60.7% since the credit crisis in 2008, while the nominal GDP has increased by only 9.2% and fiscal revenue increased by 7.4% over the same period. By the end of 2012, its debt outstanding is expected to rise to 104.8% of GDP and 608.7% of fiscal revenue. The situation exacerbates the reliance of the debt repayment sources on debt income, and the debt repayment sources are diverging increasingly further from the wealth creation capability, indicating that the solvency of the federal government is on a descending trend.
4. As a result of the pending fiscal cliff, the U.S. economy will probably fall into recession in 2013, and stay weak in the long term, which will further weaken the material basis for the government to repay debt. The U.S. is facing an unprecedented crisis of excessive credit. The inevitability and chronicity in the credit bubble burst will directly lead to the continued slump in total social consumption, triggering a chain reaction of long-term economic downturn, and the economy may go into a slight recession in 2013 due to the emergence of fiscal cliff. Consequently the federal government revenue base will fluctuate, expanding the degree of deviation between debt repayment sources and wealth creation capability.
5. Debt limit lifting and debt monetization are becoming the long-term policy of the U.S., and the real solvency of the government will continue declining. In order to avoid suffering an economic recession resulted from the abated virtual social consumption capacity established by the long-standing and excessive credit expansion, the U.S. government has adopted even greater unconventional credit expansion, which drags the country into a cycle of continuously lifting the debt limit to stimulate the economy while sustaining government solvency by excessive issuance of dollar. As the resulting risks of dollar depreciation keep accumulating, the decline in the government real solvency will become persistent, and the vulnerable credit relationships will bear increasing risk of breaking due to the frequent occurrence of emergencies such as the debt limit.
In summary, Dagong views that as the negative effects from key factors affecting the U.S. federal government solvency such as the debt repayment environment, wealth creation capability, debt repayment sources have been increasing, emergencies such as fiscal cliff and debt limit will further increase the vulnerability in the government solvency. Therefore, Dagong has put the U.S. federal government credit ratings on the negative watch list. Dagong will adjust the credit ratings according to the real circumstance to reflect the soundness of the U.S. federal government debt.