C. Myblog

Chinese Rating Agency Downgrades U.S. Credit Rating

August 5, 2010

Chinese rating agency Dagong Global Credit Rating Co., known in China for rating companies, recently issued credit ratings for 50 countries for the first time. (Dagong’s Report)

Below is an excerpt of the top 20 nations rated:

Perhaps the most notable was the downgraded AA rating given to the U.S.—two levels below the top grade.  While Dagong’s downgrade of U.S. creditworthiness hasn’t created the financial turmoil that Moody’s or S&P’s could, it has raised some interesting questions:

  • Why would Dagong downgrade a significant portion of investments owned by China?
  • What will China do with its current Treasury holdings given the downgrade?
  • How will the downgrade affect China’s Treasury purchases and holdings in the future?
  • Inasmuch as the downgrade has had nominal, if any, impact on U.S. financial markets thus far, will it have any influence at all on Western rating agencies?

As the largest foreign holder of U.S. Treasurys (around $868 billion as of May 2010 according to the U.S. Department of the Treasury), China’s response to these questions will have a significant impact on the U.S. economy.  Whether purchasing, selling or holding Treasurys, China influences the trajectory of interest rates here—which changes the economic conditions that businesses, including credit unions, must operate in.

So while Dagong and China may not be a daily consideration for credit unions, following developments in the U.S. Treasury market will be an important factor to business planning and exploring where interest rates will go.

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