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Dagong Downgrades the U.S. Sovereign Credit Ratings to A- Dagong Global Credit Rating Co., Ltd.

Time:2013-10-17 Source:dagong Editor: Print Font Size: Big Normal Small
On October 16, 2013 EST, the U.S. Congress approves the resolution to end the partial government
shutdown and raise the debt ceiling. By such means the U.S. Federal Government can avoid the default
crisis for the moment. However the fundamental situation that the debt growth rate significantly
outpaces that of fiscal income and GDP remains unchanged. For a long time the U.S. government maintains
its solvency by repaying its old debts through raising new debts, which constantly aggravates the
vulnerability of the federal government’s solvency. Hence the government is still approaching the verge
of default crisis, a situation that cannot be substantially alleviated in the foreseeable future. In
light of these facts, Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”)
decides to downgrade the local and foreign currency credit ratings of the U. S., which has already been
on the negative watch list, to A- from A, maintaining a negative outlook. The rationale that supports


the conclusion is as follows:


1. The partial U.S. federal government shutdown apparently highlights the deterioration of the

government’s solvency, pushing the sovereign debts into a crisis status. The U.S. federal government
announced its shutdown on Oct. 1, 2013, a radical event that reflects the liquidity shortage aroused by
depleting stock of debts without the increase of new debts, directly resulting in the federal government
lack of the funds for its normal function. The partial U.S. government shutdown is an inevitable outcome
of its long-term failure to pay its excessive debts. During the fiscal years from 2008 to 2012, the
ratio of the federal government’s stock of debts to fiscal income increased from 4.0 to 6.6. Under such
circumstances, the federal government that can hardly sustain its own expenses, not mentioning
collecting reliable income to cover its huge amount of debts. Substantial decrease of the U.S.
government’s solvency is proven by this shutdown incident, which pushes the federal government into a

crisis position of debt cliff and default.


2. Since the outbreak of the U.S. 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. Because of the fact that the federal government now depends highly on
borrowing new debts to repay its old ones, vulnerability of its debt chain is accumulated so that
technically debt default may occur at any time. For the fundamentals of government debt repayment
condition will not be essentially improved, the federal government's debt cliff will persist in the long


3. Liquidity has been continuously injected into international financial markets from the U.S., 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. In order to avoid the debt default caused by
the lack of debt repayment sources such as fiscal incomes, the U.S. government has been taking advantage
of the international currency dominance of the U.S. dollar to monetize its debts and has been taking
quantitative easing monetary policy to maintain its government solvency since 2008. The devaluation of
the stock of debts hereby directly damages the creditors’ interests. Dagong estimates that the
depreciation of the U.S. dollar caused a loss of USD628.5bn on foreign creditors over the years of 2008

to 2012.


4. 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 U.S.
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. Ever since Obama’s
inauguration in 2009, the U.S. Congress has extended the debt ceiling for five times, reaching a total
volume of USD5.1tn. This further raise of the debt ceiling shows the government’s incapability of
improving its solvency by improving the basic economic and fiscal elements.


5. The Democrats and the Republicans of U.S. do not have a consistent strategy target to solving the

sovereign debt problem. As the issue of paying sovereign debts falls into a tool that the parties make
use of to realize their own interests, the political environment is unfavorable for eliminating the risk
of its sovereign debt default in the long term. The recurrence of the bi-partisan conflict over debt
ceiling once again reveals the U.S. superstructure’s incapacity to solve national debt crisis. A debt
crisis evolves into a political crisis, which in turn exacerbates the debt crisis. Such political
environment over debt repayment renders the dim and pale prospect of the U.S. federal government’s

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