Dagong Global Credit Rating issued its own sovereign debt ratings, downgrading many Western countries, including the USA, UK, Germany etc.   Dagong’s CEO stated in an interview with the FT: “Western credit rating agencies were politicized, highly ideological and try not to adhere to objective standards” adding “China as the biggest creditor nation should have a greater say in how credit risks are judged.” 

Dagong has applied for NRSRO status in the USA and claims that the SEC is withholding certification unfairly.  The SEC however seems to have difficulties in assessing the objectivity of Dagong’s methodology because it has no offices in the US, does not rate US companies and has no US customers.  The SEC suggested to visiting Dagong’s China offices; however that idea was rejected by Dagong because it would impinge on China’s sovereignty.  Since Dagong does not disclose its methodology it hardly can expect international investors to trust Dagong’s objectivity.

BIIA has asked its country risk expert Dr. Hans Belcsak, President of S. J. Rundt & Associates, and a Director of BIIA to comment on Dagong’s rating concept:

“I am, in principle, very much in favor of seeing a new global rating agency emerge, since the big established ones have certainly not always done the best possible job and have all too frequently been reactive rather than proactive, hitting countries with ratings downgrades when they were already on their knees and when the revision did nothing to help existing creditors.

This said, however, I find Dagong’s approach to be too simplistic to be very useful. Granted, I know nothing about their methodology, but extrapolating from the results it would seem to me that their focus is mainly on the difference between the money a country’s public sector owes and the hard-currency assets it has available. That is, of course, an important facet for any meaningful analysis, but it lacks hugely important components.

For instance, a country’s past history in debt management should not be ignored. Nor should “ideology,” since it goes a long way in determining whether a nation has not only the means but also the will to service what it owes. By Dagong’s standards, Ecuador, for instance, would have had to have a fairly high rating just before its recent default, because it easily had the wherewithal to pay its debts. That the government decided not to do so was a decision that on objective standards alone would not have been predictable (it was for all those who took a close look at the regime’s ideology).

Also, the rating for the United States seems to overlook totally that the US, as the country with the world’s reserve currency, incurs all its foreign debts in US dollars, which it can print, so that objectively it will never have a real need to default.  While I do believe that the US debt, even at the current USD 13.5 trillion, is unsustainable in real terms, this will ultimately be resolved by inflation and currency depreciation, not by default.  These are, to me, extremely important nuances that Dagong appears to ignore. I would love to see a company with a better rating system emerge, not just one with a different one.”   Dr. Hans Belcsak

BIIA Newsletter July II – 2010 Issue