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US already in default, says Chinese rating service

Sandy Smith's picture

A weaker dollar is the culprit, says the head of China's Dagong rating agency.

Agence France Presse reports today that Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., was quoted in China's state-run Global Times newspaper as saying, "In our opinion, the United States has already been defaulting" on its sovereign debt. Guan made his statement one day after the Chinese government urged Washington to put its fiscal house in order.

Dagong is the only Chinese agency that issues ratings on sovereign debt. Guan argued that by allowing the dollar to weaken against other currencies, the U.S. had eroded the value of Treasury bonds held by foreign investors, including China. That loss of value, he said, put Washington in de facto default on its obligations.

All three of the major American rating agencies continue to give U.S. government debt their top rating. However, Fitch, Moody's and Standard & Poor's have all warned that rating would be downgraded if Congress fails to raise the debt ceiling by Aug. 2, the date when the Treasury Department says the government can no longer legally borrow money.

The Chinese government is the largest holder of Treasury securities in the world, but it has been shedding them lately over worries that the governments massive stimulus spending, financed by borrowing, will lower the value of its holdings by weakening the dollar - the scenario Guan said is already playing out. Chinas holdings of American sovereign debt have fallen from a peak of $1.175 trillion last October to $1.145 trillion as of March, and the government continues to sell.

The agency Guan heads has been critical of the big three Western services for failing to adequately assess and disclose risk in the runup to the financial market meltdown of 2008. Dagong currently gives lower ratings to debt issued by the U.S. and several other Western governments than the American agencies do, following the logic Guan articulated today.

Congress and the White House have been in negotiations over raising the budget ceiling for most of the year. Congress has insisted that any bill to raise the ceiling include significant spending cuts to reduce the debt.

Image source of U.S. Dollar: Wikipedia

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