The Beijing based Dagong Global Credit Company has become the first non-Western agency to release a sovereign credit rating report which downgrades the US from the highest to the third highest AA credit rating. Dagong's brief is to break the monopoly of international agencies Moody's, Standard and Poors' and Fitch.
Presenter: Claudette Werden
Shaun Rein, China Market Research Group; Professor Michael Pettis Peking University
WERDEN: Dagong's credit risk evaluation report covers 50 countries whose GDP accounts for 90 per cent of the world's economy. The ratings results for 27 of those countries are markedly different to those given by the three most popular western rating agencies, Moody's; Standard and Poors' and Fitch. Dagong says Brazil and other emerging economies were rated higher because of their political stability and strong economic growth.
Singapore, Australia and New Zealand were among those who received the top triple A rating. China was upgraded to the second highest rating of AA+ along with Germany and Canada. Japan, Britain and France scored AA-. Shaun Rein, founder of the Shanghai based China Market Research Group sees Dagong's sovereign debt report as another step by
China to become a key player in the international financial system but he also believes the report is an attempt by Beijing to counter continued pressure by the US on its yuan policy.
REIN: I mean when you start to have one of the major Chinese rating agencies downgrading american debt and being able to use this, it becomes a tool politically to put pressure on the United States to maybe change some of its financial regulations. I think this is key when you realise that China's holding so much of America's debt.
WERDEN: Has it got anything to do with America arguing the case for a higher yuan?
REIN: Yeah I think the United States wants to appreciate the renminbi right now but China doesn't want to do that, it would impact the export sector too much, would hurt chinese exports, hurt chinese workers and I actually don't think it will help the United States that much but having this credit rating downgrading American debt this gives more ability for China to say we're worried about our exports to the United States getting hit due to America's credit ratings and America's economy is not very strong thus it gives them more ammunition to say we need to delay appreciating the RMB too quickly and too much
WERDEN: Dagong says the benchmarks it uses to measure credit risk are fairer . It argues the credit rating systems of the three main international rivals are incorrect and irrational and their reputations have been seriously tainted by their failure to predict the global financial crisis. Michael Pettis finance professor at Peking University's Guanghua School of Management says Dagong's credibility is dependent on its reputation which is something that can only be measured over time. But he rejects the company's argument of an east west ratings divide.
PETTIS: The argument that the western rating agencies have a poor track record is not completely true, over recent years they developed a poor track record but that's probably not a surprise, someone like Hyman Minsky would have pointed out that during long periods of stability the whole system moves increasingly towards risk and it becomes more and more difficult to evade or avoid that. But assuming all of that is true, it doesn't then follow that a non western rating agency is going to do a good job. I remember in the 1980s we heard that argument coming a lot from Japanese institutions, the argument basically was that the risk profiles that western ratings agencies perceived in Japan turned out to be completely wrong, Japanese banks were incapable of taking on bad risks, incapable of defaulting that the whole credit risk system in Japan was structurally different from that of the west and systematically misunderstood by western ratings agencies and that was a very powerful argument of course until 1990 when we saw massive defaults and bankruptcies and over the last twenty years, nobody in Japan any longer makes that argument.
WERDEN: So basically you're saying the way you measure risk, is no different if you're measuring it in Asia or the West?
PETTIS: Absolutely not if I owe you one hundred dollars, I have to have $100 in assets or $100 in future cash flow to pay you back and if I don't , you can be Asian, you can be martian, you can be whatever you like but you're not going to get your money.