Just as it said in 2010, Dagong still claims that its ratings are distinctive because they put greater weight than those of Moody’s and S&P on countries’ growth potential and fiscal position, which theoretically leaves them better able to generate income and resources to cover any debts. But a careful statistical comparison of the ratings brings these claims into doubt. None of the differences between Dagong and its U.S. counterparts can be explained by any economic variable—not growth rates, level of economic wealth, or even debt-to-GDP ratio.
The only factor that definitely matters is politics. Dagong underrates democracies and overrates authoritarian regimes.
An overlay of Freedom House’s classification of countries as free, partly free, and not free according to their degree of political freedom yields a clear pattern: Dagong rated 30 countries categorized as free lower than Moody’s or S&P while giving a higher rating to only 12 free countries. An analysis using the Economist Intelligence Unit’s regime-type scores of democracy (ranging from 1 to 10) yields the same result. If a country is rated one point higher (suggesting it is more democratic), Dagong on average gives it a one-unit lower credit rating. Moreover, Dagong is 70 percent less likely to rate a country higher than Moody’s or S&P if that country is democratic.
These findings do not apply in every single case, but they are extremely common. Four of the five countries receiving the biggest bump by Dagong are classified as “not free”: Oman, Russia, China, and Saudi Arabia. The fifth is South Africa, a member of the BRICS nations alongside Brazil, Russia, India, and China. By contrast, democracies typically fare poorly, as is visible with not only the United States but Iceland, Argentina, and Ukraine.
What’s the bill?
Because no one pays attention to Dagong’s sovereign ratings, they have no real-world significance other than as an ideological snub of the West. But that might not always be the case. Two-way capital flows in and out of China are likely to rise, China’s capital markets will at some point deepen, international use of the renminbi for trade and finance will eventually rise, and China will have a bigger voice in the International Monetary Fund (IMF) and other international financial institutions. Combine the possible growth of China’s global financial gravitational pull with an extended period of fiscal and financial troubles in the United States and West that undermines confidence in the global rating agencies, and China’s raters may finally get their day in the sun.
Technically, it is not easy to quantify the value of a shift from one ratings system to another because such massive changes in ratings, either downgrades or upgrades, are unheard of, and many factors can shape the interest rates of countries. That said, we can make an educated guess of what the change in costs would be by making a couple of reasonable simplifications in how the interest rate would change should a country’s rating rise or fall. Assume a very small, fixed 0.05 percent change in the interest rate for each notch change in ratings. (A three-notch change would mean an interest rate difference of 0.15 percent.) Another option, which is likely more realistic, is a graduated shift, with the first notch difference resulting in a 0.05 percent change, the second a 0.10 percent change, and so on. (A three-notch shift using this method would be a 0.30 percent interest rate change.)
The Democratic Deficit: Summary of Estimated Changes in Debt Interest (billions of U.S. dollars)
By: via @AlliesFin Serve T.ME/ALLiESFiN
