Credit Rating Agency strips US, UK of AAA status

Yes, you read that right.  The Caveat is that the credit rating agency is very new and that it is based in China.  Via Dagong Credit:
As a non-western rating agency, this is not only the first one in China, but also the first one in the world, that releases information on sovereign credit risks.
The on-going financial crisis which originated from the U.S. and the latest Greek debt crisis, have fully reviewed the shortcomings and defects of existing sovereign credit rating agencies. In this context, the international community has reached consensus to reform the existing international credit rating system. Chinese President Hu Jintao has lately stressed at the fourth G20 summit in Toronto that : "we must develop an objective, fair, reasonable and uniformed method and standard for sovereign credit rating, so that the rating result can precisely reflect a country's economic situation as well as its level of credit risk."

In this background, Dagong has recently assigned sovereign ratings for 50 countries for the first time, the geographic locations of which are in different continents around the world. Among them ,20 countries in Europe, 17 countries in Asia, 2 in North America, 6 in South America, 3 in African and 2 in Oceania. The total GDP of these 50 countries accounted for 90% of that of the whole world. China is assigned AA+ for RMB-denominated debt and AAA for foreign currency debt. The United States is assigned AA for US-dollar-denominated debt and AA for foreign currency debt, Germany is assigned AA+ for local currency debt and AA+ for foreign currency debt, Japan is assigned AA- for local currency debt and AA for foreign currency debt. In terms of overall credit level, investment grade of local currency credit rating accounts for 72%(BBB- and above), and speculative grade (BB+ and below) accounts for 28%; investment grade of foreign currency credit rating accounts for 74%, and speculative grade accounts for 26%. On the respect of consistency of the foreign currency rating and local currency rating, there are 38 countries getting the same ratings, and 3 countries have higher foreign currency rating than local currency rating, 9 countries have higher local currency ratings. It reveals nearly all the characteristics of typical regional credit risk, the distribution of credit risk around the world as well as their changing trend.

A significant difference between Dagong and the three international rating agencies, i.e. Moody’s, S&P and Fitch in terms of their rating results is that Dagong emphasizes more on the country’s capability to pay its debt. If you analyze the rating grades (regardless the difference of + or - symbol), the three international rating agencies do not have much differences in their ratings to a particular country. However, Dagong’s ratings are quite different from theirs. Among these 50 countries, 27 countries received obviously different ratings from Dagong. Those countries which have received higher ratings are mainly the new emerging countries which have political stability and good economic performance. Those countries which have received lower ratings are many developed countries which have shown economic growth and are heavily burdened with increasing debt. These differences are caused by different rating concept and method which have been used by Dagong. More importantly, during the rating process, Dagong has insisted to extend a fair rating which should not be affected by the ideology in the country.

What is Dagong’s new country credit rating standard? Guan Jianzhong said, “the core elements of this standard are the "national governance capacity, economic strength, financial strength, fiscal strength and foreign exchange strength." the core concept of Dagong sovereign rating standard is: the wealth creating capacity is the fundamental for a country to support its national borrowing capability and the source of debt payment. Based on the general principles of the formation of credit-debt relations, Dagong decides on the final credit rating of each country by studying the interrelationship of related factors and considering the country-specific circumstances through a complex analysis process.

As elaborated, in its rating process, Dagong stresses on five principles as follows:
  • First, a systemic evaluation of the country’s comprehensive institutional strength and its fiscal status;
  • Second, the fiscal status is the decisive factor for the government to pay its debt;
  • Third, the government capacity to increase its revenue is the fundamental factor to the country to pay its debt while its capacity to borrow is not the guarantee factor;
  • Forth, the comprehensive institutional strength has a prominent role in protecting the stability of the country’s credit when the country is facing the more frequent external shocks;
  • Fifth, make sure that the statistics and information are reliable, timely and consistent.
Comparison graph is via Alphaville.


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