January 16, 2018 / 7:30 AM / in a year

Chinese agency Dagong cuts U.S. sovereign ratings to BBB+ from A-

BEIJING (Reuters) - China’s Dagong Global Credit Rating Co, one of the country’s most prominent ratings firms, on Tuesday cut the local and foreign currency sovereign ratings of the United States, citing an increasing reliance on debt in the world’s largest economy.

Dagong said in a statement that it cut the sovereign ratings to BBB+ from A- and also placed them on a negative outlook.

The growing reliance on the debt-driven mode of economic development will continue to erode the solvency of the U.S. federal government, the Beijing-based ratings agency said.

In December, U.S. President Donald Trump signed into law a package of tax cuts that will add $1.4 trillion over a decade to the $20 trillion national debt.

“Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track,” Dagong said.

“Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weakens the base of government’s debt repayment.”

The U.S. embassy in Beijing could not immediately comment.

International ratings agencies Fitch and Moody’s Investors Service both give the United States their top AAA ratings. S&P Global has put the U.S. on a slightly lower grade of AA+ since 2011.

In December, the U.S. government reported a $23 billion deficit, compared with a gap of $27 billion from the year-earlier month. That took the deficit for the fiscal year to date to $225 billion, versus a gap of $210 billion a year earlier.

The government will have to raise the debt ceiling frequently, Dagong said.

“The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis,” the Chinese ratings firm said.

Last week, Bloomberg News reported that Chinese officials reviewing the country’s vast foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds, partly because that market is becoming less attractive for them.

That spooked investors worried that sharp swings in China’s massive holdings of U.S. Treasuries would trigger a selloff in bond and equity markets globally. The report sent U.S. Treasury yields to 10-month highs and the dollar lower.

China’s foreign exchange regulator has since dismissed the report.

“The market’s reversing recognition of the value of U.S. Treasury bonds and U.S. dollar will be a powerful force in destroying the fragile debt chain of the federal government,” Dagong said.

Reporting by Ryan Woo; Additional reporting by Philip Wen; Editing by Shri Navaratnam and Sam Holmes

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