Asia's two biggest economies are in the ratings firing line alongside Europe and the United States as they deal with massive debts built up during the global financial crisis. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, told Reuters in an interview that China's local currency debt rating could be downgraded over the next 12 to 24 months. "We expect a material deterioration in bank asset quality," he said. "If the problems in the banking system pan out as we expect or are even worse over the next 12 to 24 months, then that would incline us to take the rating downwards." – Reuters
Dominant Social Theme: There is trouble ahead, but ratings agencies are on top of it.
Free-Market Analysis: It used to be easier to believe in ratings agencies but since the world's greatest companies almost went out of business in 2008 it is more difficult. Now Fitch is once again sounding the alarm on China and Japan but cynics might suggest it is too little too late.
There is something fascinating (in a morbid way) about watching the ratings triumvirate grind on. It is business as usual and one is not supposed to mention the entire system failed only three years ago. In fact, it took the combined efforts of the world's central banking community injecting some US$50 trillion into the marketplace (we estimate) to salvage the world's economy.
And where were the most powerful ratings agencies? There is no answer. Even today, there is no explanation for how so many companies and countries that were given top credit ratings might have disappeared without a trace, absent central banking stimulation.
Many of these companies had AAA ratings. And yet in one desperate weekend, denied credit and liquidity the world's great industrial and financial leaders might have failed abysmally. The world's financial system teetered in ways that had not been foreseen by any mainstream analyst or economist.
Defenders of the system as it is will maintain that everything worked exactly as planned. Central banks overcame a liquidity crisis with an unimaginable amount of credit and cash. The full amount of manipulation is not known, but the figures are staggering. And one is tempted to ask, "How can an economic system that needs a US$50 trillion injection be said to work within a free-market environment?"
The answer, of course, is that the current system of economics is not free-market at all. It has been developed and put into play by the Anglosphere power elite, a group of impossibly wealthy families that have determinedly created central banks around the world busily printing money from nothing and debasing all currencies as a result.
The currency debasement is supposed to help the world overcome its financial problems, but actually it works in an opposite way, creating ruinous busts that further consolidate industry and finance. This is the REAL goal of the powers-that-be. Central banking money printing from nothing is intended to usher in world government. Depressions and financial chaos are useful tools in this regard.
Here at DB, we have often warned that the world's economy – such as it is – is in danger of a full-scale depression should China's financial system founder, as it surely will at some point. Since, somehow (wonders never cease) China has adopted a full-on Western economy complete with an over-stimulative central bank, it is only a matter of time before disaster strikes.
We began to warn about a Chinese economic failure some two years ago with some (a few) others, and now we see the ratings agencies are beginning to catch up. Predictably, however, Fitch does not question the financial system itself and is content to place its warnings in the context of the Chinese (and Japanese) banking system.
The downgrade is quite hedged as well, warning only that a downgrade might occur within two years "as the country's banks struggle with debt loads following a lending surge to help lift the economy during the 2008 financial crisis."
Japan, meanwhile, "weighed down by a public debt load twice the size of the $5 trillion economy, faced a greater-than-even chance of a downgrade in part due to a political impasse that is stalling plans to clean up its finances," according to the Reuters report. Here's some more from the article:
Fitch has sounded the loudest warnings of the three main ratings agencies about the surge in lending in China and is the only one with a negative outlook on the long-term local currency debt rating. China reported local government debt of 10.7 trillion yuan ($1.67 trillion) as of the end of 2010. More than 347 billion yuan in urban construction investment bonds were issued in the five years to 2010. Last month, China's top banking regulator Liu Mingkang said work to clean up local government debt was progressing smoothly, the latest comment from officials to try to reassure skeptical capital markets that risks were manageable.
Colquhoun said non-performing loans at Chinese banks were about 2 percent of the total, but if lending to local government financing vehicles was appropriately classified, the figure would be more like 6-7 percent. "That by itself is sufficient to exhaust the banks' internal absorption capacity," he said. "So any further deterioration in asset quality beyond that… would lead to a requirement for sovereign support, which then affects the sovereign credit profile."
While in general terms it was known how much stimulus during the financial crisis cost European countries and the U.S., Colquhoun said, because in China it was done through the banking system, "in a nutshell we don't know how much it cost." "We haven't seen the full cost come through yet."
Japan's credit rating has already been cut this year by Fitch's rivals, Standard & Poor's and Moody's. Like Fitch, they cite the inability if Japan's leadership to come up with a plan to reduce the debt load over time. "We think the ratings on current trends are more likely than not to go down," Colquhoun said. "To shore ratings up at their current level we need to see a credible fiscal consolidation plan."
According to Reuters, hopes now rest on Yoshihiko Noda, appointed last week as Japan's sixth prime minister in five years, to forge a political consensus in the divided parliament, or Diet. The March 11 earthquake and tsunami and the recession it triggered have compounded Japan's problems.
All of this sounds impressive, of course. Fitch, especially, is being aggressive in warning about the problems that China and Japan face. But one is drawn back to the injection by central banks of what may have been up to US$50 trillion some three years ago in an attempt to salvage the world's economy.
In fact, the world's central banking economy does not work. The Anglosphere power elite has no answer to critics at this point because there are no answers. When one is handing out US$50 trillion to one's colleagues and cronies to keep them afloat, the system is bankrupt – morally, spiritually and as a working entity.
The system staggers on of course. The Anglosphere ratings agencies after some disarray have emerged with a slightly tougher attitude. But ask those at the top how they managed to miss the catastrophic degredation of the world's economic system in 2008 and they will have no answer.
Ask, too, whether such a catastrophe can reoccur and the answer will be that such situations are once in a lifetime events. That may be so, but in this instance, we would argue the catastrophe lingers. It is not business as usual anymore even though the elites wish to pretend it is.
It is the Internet itself that has complicated the lives of the elites and their enablers when it comes to the current economic system. Millions – billions – of people are aware that top corporations and banks received up to a US$50 trillion bailout a few years ago. These same people are struggling to keep their homes and jobs and no one is giving them any money, or not significant sums.
As we have pointed out many times, what has disintegrated is the moral argument for the system as it is. The ramifications are immense and have yet to play themselves out, though the unrolling Internet Reformation will continue to resonate and cause ever more powerful sociopolitical changes.
In our view, the system cannot be salvaged. In fact, it is likely being deliberately destabilized so that world government and a world currency can be created and implemented. The coming Chinese and Japanese economic crises will make the world's financial situation even worse, though many people still don't appreciate the imminence of the danger despite the warnings of some analysts and now Fitch.
What people also have a hard time understanding is that the system is deliberately set up to fail. On the other hand, the elites don't seem to grasp that an increasing number of people simply don't believe in the current economic structure.
Fitch and other ratings can pretend they are making hardheaded business decisions within a free-market context, but they are not. And more and more people are quite aware of it. This is the intractable problem that the Anglosphere power elite faces, thanks in large part to information disseminated by the Internet.
Ultimately, it may be this growing lack of faith in the system itself that will pose the biggest dillema for the world's wealthiest central banking families. Recessions and depressions can be overcome, but when people cease to believe in the fundamental organization of their daily lives, the problems are multiplied significantly. The unraveling of the Western world as it was constituted in the 20th Century may occur not because of financial difficulties but because people have fundamentally ceased to believe. Who can blame them?