China rating agency blames U.S. for "credit war"

BEIJING/NEW YORK Fri Jan 28, 2011 3:09pm EST

United States money printing plates are seen at the Museum of American Finance in New York October 15, 2010. REUTERS/Shannon Stapleton

United States money printing plates are seen at the Museum of American Finance in New York October 15, 2010.

Credit: Reuters/Shannon Stapleton

Related Topics

BEIJING/NEW YORK (Reuters) - The ultra-loose monetary policy of the United States is setting the stage for "a world credit war," a Chinese rating agency said on Friday, in the latest warning against soaring debt burdens in developed economies.

The Beijing-based Dagong Global Credit Rating firm took concerns about a world currency war to a higher level as it suggested China and other emerging market countries may need to reduce their U.S. Treasury holdings to "avoid unpredictable losses on their own interests."

It also said in its 2011 Sovereign Credit Risk Outlook that quantitative easing by the U.S. Federal Reserve has "eroded the legitimacy of the global monetary system that takes the dollar as the key reserve currency."

The policy easing was "bringing the U.S. dollar's credit-worthiness to a vulnerable position," the ratings group added.

"I think they're aligning some very real threats," said Jonathan Masse, who helps manage $616 million at AlphaShares, a California-based money manager.

"Even if our outstanding debt remains constant over the longer run, the real threat is the interest rate rising. If our credit rating drops, and we end up paying higher rates, there would be less money available to some of these big plans" that President Obama has outlined.

The U.S. Treasury declined to comment on Dagong's report, which followed warnings by the International Monetary Fund and Moody's Investors Service on lack of government action on the U.S. growing budget deficit.

In Davos, however, U.S. Treasury Secretary Timothy Geithner said there was a growing recognition that the U.S. fiscal position is unsustainable. He said political will to put it back on track "is not fully manifest at the moment but it's coming."

Dagong has been rating Chinese corporate bonds since 1994, but it is a relative newcomer to sovereign debt ratings. It created a splash by rating the United States at AA, below China's AA-plus, in July 2010.

It downgraded the U.S. sovereign credit rating last November, following the Fed's decision to pump more dollars into the U.S. economy.

DIVERSIFYING OUT OF TREASURIES?

Although Dagong's statement does not fully represent Beijing's view, it was in line with the government's unhappiness with the U.S. policy easing, which has been blamed by Chinese officials for fueling global inflation risks.

As China's $2.85 trillion foreign exchange reserves are mainly denominated in U.S. dollars, Chinese Premier Wen Jiabao had publicly voiced concerns about the assets.

President Hu Jintao told a recent Group of 20 nations summit in Seoul that China wanted "an international reserve currency system with stable value, rule-based issuance and manageable supply."

Other emerging market powerhouses, such as Brazil, have been accusing the United States of triggering a world currency war with its easy-money monetary policy.

Dagong said in the English-language report that the United States is trying to "haircut" its creditors by permitting a weakening currency.

"The behavior that the United States ignores international creditors' legitimate interests indicates a dramatic decline of the country's willingness to repay the debt," Dagong said.

In defining the "credit war," Dagong said "it aims at encroach on other countries' interests through continuous depreciating the actual value of the currency; and it arouses all the countries in the world to take various credit resources as a financial weapon to safeguard the national interests."

It said capital flows into emerging economies stemmed from cheap dollars and is "a destructive factor to the healthy economic development in different countries."

For full version of Dagong's report, see here

PORTUGAL AND SPAIN

Dagong added the sovereign debt crisis in the euro zone countries would intensify in 2011, and it may downgrade sovereign credit ratings of Portugal and Spain.

"Countries, such as Portugal and Spain, will have to ask for bailouts in 2011," it said.

Earlier this month, China reaffirmed a commitment to buying Spanish bonds, while newspapers in December said Beijing was ready to buy Portuguese debt to help it through Europe's spreading debt crisis.

Echoing the International Monetary Fund and western rating agencies, Dagong also warned that the governments in the United States, Japan and Germany will face higher pressure on debt repayment in case of inflation, economic downturns or if investors start dumping their bonds.

Ratings agency Standard & Poor's cut Japan's long-term debt rating on Thursday for the first time since 2002, and hours later Moody's Investors Service warned the risk of a negative outlook on the United States' top AAA rating, although small, was rising. A negative outlook means a credit downgrade is more likely in 12 to 18 months.

The IMF said the G7's two biggest economies needed to spell out credible deficit-cutting plans before the markets lose patience and dump their bonds.

(Additional reporting by Walter Brandimarte in New York; Editing by Kim Coghill and Padraic Cassidy)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (20)
arivas wrote:
Hmmm, so the US “loose” monetary policy is a “destructive factor to the healthy economic development in different countries”? What does that make the Chinese ultra loose monetary policy, coupled with a mercantilistic debasing of its currency vis a vis the $, and therefore vis a vis all its trading partners, developed or developing?

Ultimately, China will either allow its currency to float, as well as adopt a policy of improving the economic health of its own population, instead of focusing solely on the interests of its elite, or, it will simultaneously import inflation, destroy the value of its foreign assets, and destabilize the world economy

Jan 28, 2011 6:03am EST  --  Report as abuse
d3v wrote:
Well the difference between the Chinese currency and the US one is that Chinese currency is not used as a reserve currency. Furthermore commodities are not valued in Renminbi but in USD. So if the USD depreciates in value the prices of commodities increases and that stokes inflation in every country in the world. It also devalues the foreign exchange reserves of hundreds of countries. So that is why the US policy is so destructive.

Jan 28, 2011 7:07am EST  --  Report as abuse
bobz wrote:
China is playing with fire. As soon as the US realizes that the world hates it they will start to use natural gas to lower prices at the pump and Congress will start to put tariffs on pruducts from around the world. What the world forgets the US will not lose it’s will to lead. The US politicians need to come off their allowing lobbyist buy their votes and do whats in the best interest of the American People.

Jan 28, 2011 7:56am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.