Toward global ratings reforms

The assumption is that these sovereigns are able and willing to repay their debt. Yet, despite the deleveraging rhetoric, in most cases the debt burden is actually increasing.

Japan's rating is AA- (the same as China's), even though its debt burden is twice as large in relative terms as that of Italy, which S&P has downgraded to BBB-, the closest to junk. The U.S. rating is AA+, although its debt burden in relative terms is significantly higher than that of France whose rating is AA.

The U.S. debt burden exceeds $19.2 trillion, which means that the nation must pay $2.4 trillion in total interest - more than the largest budget items (Medicare/ Medicaid, social security and defense) together. America also lacks a credible, bipartisan and medium-term debt-reduction plan, which would seem to contradict the S&P requirement that a country is not just able but willing to pay its debt.

Finally, the U.K. and Germany continue to enjoy AAA ratings - although their public debt level is in relative terms twice as high as that of China.

Since the global financial crisis, the Chinese credit rating agency Dagong has downgraded its U.S. rating several times. Meanwhile, U.S. Securities and Exchange Commission (SEC) in 2010 rejected an application by Dagong to enter the U.S. marketplace. In the advanced economies, the argument is that Dagong reflects Chinese interests. Yet, the argument that the "Big Three" reflect the interests of major advanced economies is discounted in advanced economies.

Unlike the large CRAs, Dagong and China are committed to reshaping the global credit rating system. Over time, that is very much in the interest of the international community. Consequently, these reforms are supported by a rising international consensus. Global sovereign ratings are far too important to remain a monopoly reserve of a few major advanced economies whose high-level debt poses a rising risk to global stability and prosperity.

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India China and America Institute (U.S.) and as a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Centre (Singapore). For more, see http://www.differencegroup.net

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