28 December 2012, 17:06

The Ratings War: China takes on US ‘Big Three’ agencies

The Ratings War: China takes on US ‘Big Three’ agencies

The Chinese rating agency Dagong Global Credit Rating is confirming its reputation of a “troublemaker”. It may lower the sovereign rating of the United States from “A” to a negative projection. According to world practice, revision of a country’s rating almost always leads to surrender of its conquered positions.

It is not the first time that Dagong Global takes a stab at the United States’ rating. The new reason is a lack of consensus about the national debt between Republicans and Democrats. According to the estimates of Dagong Global, by the end of 2012, the US debt will amount to 105% of the GDP and 609% of the budget income. It predicts that the year of 2013 will be difficult for the United States. According to the Chinese rating agency, next year, the US economy will probably “slide down” into recession, because the US political parties “find difficulty in achieving a long-term consensus on the final decision of the national debt problem”. The hardest blow the Chinese Agency has struck the United States with was in August 2011. It cast doubt on the US’ ability to pay foreign debts and moved the US back to 13th place in the world ranking. Later, the US agency Standard & Poor's followed the example of Dagong Global and lowered the maximum rating of the United States. Meanwhile, two other agencies of the world “top three”, Fitch and Moody's, give the highest rating for the USA. In general, ratings of about 30 out of 50 countries, assessed by Dagong Global, differ from the positions given to them by Fitch, Standard & Poor's and Moody's. In particular, in the Dagong Global version, the ratings of India, Indonesia and Brazil are significantly higher than that of the “Big Three”.

Dagong Global is going to destroy the monopoly of the “Big Three” US agencies on determining sovereign ratings. About four years ago, that is, immediately after the beginning of the financial crisis in the autumn of 2008, Dagong Global thrust a “ratings war” upon the “Big Three”. At that time, these agencies gave high ratings to American banks associated with mortgage. But their ratings turned out to be a “soap bubble”. The banks went bankrupt, and the US housing market collapsed sending the global financial market to the bottom.

Against this background, interest in the Dagong Global forecasts increased for the first time, expert of the Higher School of Economics Lev Lyubimov notes:

“The monopoly should be destroyed; it is a true trend. China is making this attempt. Does it have a motivation for this? In principle, it does. In several years it will become the number one economy in the world. Its gold and foreign exchange reserves significantly exceed the GDP of Russia. It is a very serious player on the world market that cares about its image”.

“The ratings war” has just started, so it is too early to assess its course, expert of the Institute of Stock Markets Igor Kostikov believes:

“Of course, there is an issue of the American rating agencies’ monopoly, and of course, it requires attention and efforts. But at present, I do not see any signs of this monopoly being destroyed. Unfortunately, this is not a simple task. It is necessary to apply a lot of effort and to spend a lot of money to create some sort of a real alternative to them”.

Such an attempt was made in 2012. Dagong Global, Russian Rus-Rating Company and American Egan-Jones Ratings Company formed their own “top three”. For the present, it is rather small, but very ambitious. The partners intend to establish a fully independent rankings service - Universal Credit Rating Group. It seems that the American “Big Three” have all the more reason for concern.

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