On Wednesday evening Republicans and Democrats reached a budgetary deal that analysts estimate will raise the U.S. debt ceiling to $17.5 trillion, temporarily ending the immediate threat of default until a new deal can be negotiated by Feb 7.
Despite this narrow escape from what would have been a disaster for America, it’s reported that GDP in the fourth quarter will shrink by 0.6 percent directly because of the fallout, but that’s not all -- China’s financial ratings agency, Dagong, has downgraded America from A to A-.
In a statement posted on the government’s website, Dagong said: “For a long time the U.S. government maintained its solvency by repaying its old debts through raising new debts, which constantly aggravates the vulnerability of the federal government’s solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."
Here are the five reasons it gave for its downgrade
1. Spending beyond their means:
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The partial U.S. government shutdown was an inevitable outcome of its long-term failure to pay its excessive debts. Between 2008 and 2012, the U.S. ratio of federal government debt to fiscal income rose to 6.6 from 4.0. Under such circumstances, the federal government can hardly sustain its own expenses, not to mention collect reliable income to cover its huge amount of debt.
2. Debts are out of hand and the ability to pay them is diminishing:
The huge amount of government debt not backed by sufficient government income leaves the U.S. always on the brink of default, and this situation is difficult to change in the long term. The federal government's debt rose by 60.7 percent between 2008 and 2012. During that same period U.S. nominal GDP increased by only 8.5 percent and fiscal income income fell by 2.9 percent. These facts indicate that fiscal income is losing its ability to serve as the primary source of debt repayment.
3. The U.S. is abusing its position as the dominant currency, causing damage to other economies:
In order to avoid a default, the U.S. government has been taking advantage of the dollar's international currency dominance to monetize its debt and using quantitative easing to maintain its government solvency since 2008. The resulting devaluation of the country's debt directly damages the creditors’ interests. Dagong estimates that the depreciation of the U.S. dollar caused a loss of $628.5 billion to foreign creditors from 2008 to 2012.
4. Creating new debt to pay old debt:
In order to avoid the sovereign debt default it's inevitable that the U.S. government will have to repay its old debt by issuing new debt. The fact that the debt grows faster than fiscal income will further impair the federal government’s solvency.
5. Using debt as a political tool is not in the best interest of the people:
As the issue of paying sovereign debt becomes a political tool that the parties use in service of their own interests, the political environment for a a long-term solution diminishes.