Chinese ratings agency downgrades USA to AA and UK, France to AA-

Chinese ratings agency Dagong downgrades the U.S. to AA with negative outlook. The gold price has risen - are they connected?

LONDON - 

In a move that may only serve to heighten unease about the state of many global economies, Chinese ratings agency Dagong Global Credit Rating Co (a Chinese rival to S&P, Fitch and Moodys) has downgraded the USA from its normal AAA status to AA with negative outlook.  Other nations to see their credit ratings downgraded below those normally assessed by S&P, Fitch and Moodys included Japan, France and the UK at AA-, while Spain is rated A with negative outlook and other PIIGS nations find themselves downgraded to A- or lower to - BB for Greece is very much into junk bond status, but at least at the upper end!

Top rated nations with AAA status are Australia, New Zealand, Denmark, Norway, Luxembourg, Switzerland and Singapore, while China, Canada , Germany and the Netherlands are rated AA+. Notably the Chinese rating is seen as higher than that of the U.S.

Table: Top 30 Countries in Dagong ratings

While some may consider that any statement out of China of this type also will have political implications and may be, to an extent, a move to embarrass the U.S. administration given its recent hostility to China over the yuan:dollar exchange rate, if one looks at the degree of indebtedness of many of the nations it is actually hard to criticise the ratings agency's assessments.

Given the extremely low rating given to Greece, Dagong probably expects further Eurozone tribulation ahead, with Spain, Portugal and Italy all in relatively vulnerable categories.  There's little comfort in the assessments that the global position is improving - it might have been interesting if the agency had rated some of the U.S. states in among its listings.  California is in desperate trouble, for example, and is the world's eighth largest economy.

On its methodology, Dagong itself states "The  main  elements  involved  in  the  rating  standards  are  such  issues  as  the  national management capability,  the economic strength,  the financial strength,  the fiscal strength and the foreign exchange strength, and the core of the rating ideas is as follows: it is the newly-created  social wealth  that  supports  the  national  funding  capacity  and  constitutes the  primary  source  of  debt  repayment.  On  the  basis  of  the  general  principles  of  the formation  of  credit  relations, Dagong  firstly  conducted  studies  on  the  internal  links  of 2 related  elements,  and  then  referred  to  specific  circumstances  of  individual  countries. After a complex process of analysis, the final assessment of each country's credit rating can  then  be  reached."

So what does all this mean in terms of commodities?  Overall it doesn't make optimistic reading in terms of where we are going with several normally AAA rated countries downgraded in the Dagong analysis.  Economic uncertainty should be positive for gold - indeed gold has picked up substantially today, although whether this has anything to do with the Dagong ratings is probably unlikely.  But Moodys downgrading of Portuguese debt and continuing worries over the Greek economy have weighed - and these just support the position taken by Dagong.  As for other commodities - and this includes platinum, palladium and to an extent silver which have strong industrial usage, the overall state of the economy as seen by Dagong should not be seen as encouraging.

However, as Ambrose Evans Pritchard notes in the U.K.'s Daily Telegraph regarding the differences in the Dagong ratings from those of the U.S.-based agencies,  : "The Western rating agencies put a high value on a long-established rule of law and government institutions that have proved resilient over many decades, or even centuries. China's political system may appear strong - as did the Soviet Union's - but only time will tell whether its foundations are brittle. The violent upheavals of the Cultural Revolution are still a very fresh memory."

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