S&P cuts US credit rating to AA-plus

BEIJING - The Standard & Poor's agency on Friday dealt a heavy blow to the largest world economy as it deprived the US of its top-tier AAA credit rating. Analysts said that could lead to a weakening dollar and threaten China's interests as the country holds colossal amounts of dollar assets.

S&P cut the long-term US credit rating to AA-plus, citing concerns about the government's budget deficit and worsening debt prospects despite the earlier bipartisan consensus to raise the country's debt ceiling by $2.4 trillion and cut the deficit by $2.1 trillion over a decade.

The US has held the top-tier rating from S&P since 1941. The other two major international rating agencies, Moody's and Fitch Ratings, did not change the US' triple-A rating.

Earlier, a major Chinese rating agency, the Dagong Global Credit Rating Co, downgraded US sovereign credit rating from A+ to A. The raising of its ceiling does not reverse the trend of worsening debt situation and Washington's ability to repay its debts is weakening, the Beijing-based company said on Wednesday.

The outlook on the new US credit rating is "negative," S&P said in a statement following its downgrade decision, indicating another downgrade was possible in the next 12 to 18 months.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said.

Analysts said the rating decision may likely raise borrowing costs for the US government, companies and consumers. It also brings further uncertainties to the global markets that had tumbled last week due to weakening confidence in a smooth global recovery.

JPMorgan Chase & Co estimated the cost increase could be about $100 billion a year. SIFMA, a US securities industry trade group, told Reuters that the downgrade could add up to 0.7 of a percentage point to US Treasuries' yields over time, increasing funding costs for public debt by some $100 billion.

The downgrade will also shake belief in the greenback globally, as the world's most important reserve currency has suffered from blows from low US interest rates, unclear economic recovery, and foreign investors forced to diversify their dollar-based assets.

"A debt ceiling raised plus downgrade equals weak dollar," Reuters quoted Jonathan Lewis, founding principal of Samson Capital Advisors in New York, which manages assets of $7 billion.

China has a major stake in the future of the dollar as analysts estimate that about 70 percent of its $3.2 trillion in foreign reserves is invested in dollar assets, making it the United States' biggest foreign creditor.

Zhou Xiaochuan, governor of the People's Bank of China, the central bank, on Wednesday urged the US to handle its debts responsibly to ensure the safety of Chinese investment in a statement on the bank's website.

"The dollar depreciation and rising inflation as a result of the US debt problems in the middle- and long-term will seriously affect the real purchasing power of China's foreign exchange reserves," said Zhang Bin, economist with the Chinese Academy of Social Sciences.

The yuan has appreciated by nearly 30 percent since July 2005, when China began to accelerate its reform of the country's foreign exchange rate formation regime.

"As the yuan rises against the dollar, losses occur every day (for China)," said Ye Tan, an independent finance commentator.

China must accelerate its steps to restructure its economy and reduce the source of foreign exchange pile-up to prevent shocks upon its economy caused by the fluctuating dollar, said Xie Taifeng, professor in the Capital University of Economics and Business.

But analysts also said that the dollar is still comparatively safe and there are not many good investment alternatives for China. The US Treasuries remain the best products compared with other national treasuries in the world, and that's why many foreign holders want to buy them, said Qiu Tao, a domestic fund manager.

China Daily

(China Daily 08/07/2011 page2)