Sovereign credit ratings from China's rating agency

China’s Dagong rating agency has moved into the sovereign market with a distinct difference. It has rated the United States at double-A, below China's AA-plus. Also, it rates the UK and Japan come in double-A-minus according to Reuters. While the traditional ratings agencies rely heavily on the country's historical record and culture, Dagong places more importance to growth prospects and the governmental propensity to borrow. Reuters Edward Hadas makes this point: “Supposedly sophisticated Keynesian economists can criticize the mercantilist bias of this thinking, but Dagong may be onto something. Lenders should really prefer countries that are increasing in economic and monetary strength.” Food for thought (or choking) for the US deficit reduction commission.

- Andrew Busch BMO

This is an interesting perspective. Is the ability to pay their bills better in the US or in China? The payment of debt has two parts, the probability of default and the likelihood of payment after default. The first is a function of growth and tax flows. In this case, the US growth is poorer than China. The second is related to the rule of law and bankruptcy. The rule of law has been paramount in the US, but even here there is a level of politics. We do not have to look any further than the bankrupcy issues of Chrysler and GM.

Sovereign ratings have been slow to change. It would be a positive to have more timely market driven ratings. Dagong is headed in this direction. It will be curious to see if others also move to more flexible ratings.