My latest column from the Washington Times:
The big three credit-rating agencies that totally missed the meltdown of the subprime mortgage market – Moody’s, Standard & Poor’s and Fitch – still give the United States a AAA credit rating. But there’s a newcomer in the credit-rating game – Dagong Global Credit Rating – which has a very different view of the strength of U.S. finances.
Beijing-headquartered Dagong, the dominant credit agency in China, is pushing into international markets. This summer, it rated the sovereign debt of 50 nations making up 90 percent of the world’s economy. While Americans still tend to regard U.S. Treasuries as the “safest investment in the world,” Dagong gave our debt a mere AA – lower than that of 11 other countries (including China, which it awarded an AA+). To add insult to injury, the firm declared the U.S. outlook to be “negative.”
Dagong has set off something of a hissy fit in the credit-rating world. “The Western rating agencies are politicized and highly ideological, and they do not adhere to objective standards,” Chairman Guan Jianzhong told the Financial Times in July. The company also accused U.S. agencies, which share an oligopoly enforced by government fiat, of contributing to the 2007-08 financial crisis by applying the coveted AAA rating to loads of junk subprime mortgage debt.
The chairman of McGraw-Hill, owner of Standard and Poor’s, accused Dagong of pandering to popular prejudice, insisting that S&P and the other agencies have been unfairly targeted by politicians, pundits and competitors. Also, he countered that Dagong lacks transparency in its policies and procedures.
We can debate forever whether the U.S. agencies employ more analytical rigor in the rating of their sovereign debt than Dagong, but let’s be clear about one thing: Dagong is not a chump outfit. The company boasts of more than 500 employees, including more than 200 analysts with master’s degrees or doctorates and 50 with postdoctorates. The Chinese finance ministry has directed the company to “participate in the construction of [the] Asian bond market.” Read more.
Bacon bottom line: Major global investors upon whom the United States depends to continue buying our Treasuries have a far less sanguine idea of our fiscal health than we ourselves do. I’m not saying that Dagong is correct and the U.S. rating agencies are wrong, only that the U.S. agencies do not reflect global opinion. I would be interested to know how Dagong might evaluate Virginia’s AAA debt, if it were allowed to participate in the U.S. debt-rating market. I wonder how they might view a state economy so overwhelmingly dependent upon federal government expenditures.
Note to pre-Boomers:For those who you who miss the allusion to 1970s-era “The Gong Show” edify yourself by clicking here.
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