Chinese Rating Agency: de Facto Default on U.S. Debt

June 12th, 2011
in econ_news

bad debt Econintersect:  A Chinese ratings house, Dagong Global Credit Rating Co. Ltd.,  has accused the United States of defaulting on its massive debt.  The exact basis of the charge is that the U.S. is in de facto default because it is inflating the value of the debt away.  According to the Global Times, the Chinese government is taking steps to reduce its exposure to U.S. debt.  The GT said that Beijing cut its holdings of US Treasury securities for the fifth month in a row to $1.145 trillion in March, down $9.2 billion from February and 2.6 percent less than October's peak of $1.175 trillion.

Follow up:

According to Yahoo News, Dagong has made a name for itself by hitting out at its three Western rivals, saying they caused the financial crisis by failing to properly disclose risk.  Yahoo says Dagong is trying to build an international profile to compete with the big three U.S. rating agencies, Moody's, S&P and Fitch, which Dagong has faulted for inaccurate risk ratings leading up to the financial crisis. 

From Advisor One:

Since the start of the financial crisis, market observers have noted the possibility that the U.S. might repudiate its debt through inflation or a weakened currency. Since the Chinese are the largest foreign owners of U.S. debt — holding $1.1 trillion in U.S. Treasury securities — China is naturally concerned about the sinking value of its investment portfolio. Since January 2009, the dollar has lost 9% against a basket of major currencies; it has lost a quarter of its value in the last decade.

While the Chinese are the largest foreign owners of U.S. debt, the largest single owner is the U.S. Federal Reserve, which has acquired $1.56 trillion in Treasury debt made in two rounds of massive securities purchases in a policy known as quantitative easing.

And that’s what troubles a lot of owners of U.S. debt: the Federal Reserve, as the U.S.’ biggest creditor, would have the most say in any insolvency issues; notice that the Fed has not been critical of U.S. monetary policy as the Chinese have been — of course, because the Fed is the one that makes U.S. monetary policy. Also, the Fed can at will pay back all the debt it owes by turning on the printing press.

Sources:  Global Times, Yahoo News and Advisor One


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