Dagong chairman wants Korea to join dethroning Big 3 rating agencies

Dagong Global Credit Rating Group Chairman Guan Jianzhong speaks during an interview with The Korea Times at the Conrad Hotel in Yeouido, Seoul, on Sept. 20. / Korea Times photo by Nam Hyun-woo

By Nam Hyun-woo

So far, the global credit rating market has largely been dominated by the so-called Big Three rating agencies ― Standard & Poor’s (S&P), Moody’s and Fitch Group.

Their say in the market was first questioned when the global financial crisis occurred in 2008. The three agencies were blamed for exacerbating the financial crisis by offering overly inflated evaluations on problematic financial institutions as well as approving risky mortgage-related securities. The U.S. Financial Crisis Inquiry Commission summarized in its 2011 report that “the failures of credit rating agencies were essential cogs in the wheel of financial destruction.”

Their apparent blunder has provided Dagong Global Credit Rating Group with an opportunity to enhance the company’s presence in the global rating market.

Dagong Group, led by Chairman Guan Jianzhong, started sovereign ratings in 2010 to put an end to the monopoly of U.S.-based companies, riding on the Chinese government’s push to have a greater influence in global economic affairs,

The company’s anti-Big Three drive garnered keen attention as it downgraded the U.S. from A+ to A, citing growing doubts over Washington's long-term ability to repay its debt on Aug. 3, 2011. The move came under questions when it was announced, but three days later S&P unprecedentedly stripped the U.S. of its top credit rating, creating havoc in the financial world.

Since then, Guan has been dealing blows to the “Western” rating houses, claiming that their methodologies have “failed” and “cannot interpret current risks and suggest a future direction.”

In the latest extent of his move, Guan paid a two-day visit to Korea starting Sept. 19 to urge Korea to join in its bid to establish a new credit rating framework. In an interview with The Korea Times, Guan stressed building the new framework will serve a critical role in China’s “One Belt, One Road” (OBOR) initiative, an infrastructure development strategy and framework including China and some 60 neighboring countries to create a land and maritime “road”.

The following is an excerpt of the interview with Guan on Sept. 20 in Yeouido, Seoul. The interview was through an interpreter.

Q: In March, you met Vice Prime Minister and Finance Minister Yoo Il-ho and discussed the OBOR initiative and how Korean companies can be involved. Is this visit an extension of this discussion?

A:

It definitely is. I met Yoo in Hainan, China, and had an opportunity to share my vision on the OBOR initiative including a renovation of the related credit rating framework and financing tools. Yoo must be the first person to hear about the vision, because I came up with the idea just a day before meeting him.

On Sept. 8 in Hong Kong, Dagong held a forum called Belt and Road Summit and participants agreed that the OBOR initiative needs a completely new stage. We are still working on methods to carry out the initiative and I believe building a different credit rating framework should be one of the priorities for this. And I came to Korea to draw the country’s participation in such a move.

Q: What would be the new rating framework?

For the supranational flow of money, a fair and open rating framework should be established. Everyone should have a say in that framework and everyone should share the outcome of the ratings.

When you look at the current rating framework dominated by Western rating houses, every sovereign nation has a different rating standard and the outcome differs. To be fairer, rating information should freely flow across borders. The current system was proven to be a failure in terms of interpreting the current risk, and let companies do rating shopping, which is an act of picking up ratings overly favorable to them, while rating agencies lowered standards to win business. Hence, I’d like to introduce Korea and Korean rating agencies to join the Universal Credit Rating Group (UCRG).

(The UCRG was launched in 2013 in Hong Kong as a credit rating entity founded by Dagong, the U.S. Egan-Jones Ratings and Russia’s RusRating JSC. The group believes that the current international rating system has made repeated mistakes before and after the outbreak of the global financial crisis, exacerbating its destructive effect on the world economy, and there is a need for reform of the current international credit rating system to help with the global economic recovery.)

Q. Dagong has retained such a stance for a long time and literally is in a war against other rating agencies. With refutations existing on your claim from the followers of the Big Three rating houses, what are the grounds for your opinion that they have failed?

A.

What I say is that the Western agencies’ methodology is too ideological and pro-U.S. In terms of sovereign rating, the Big Three use the same method which I believe is grading countries by Western political theories. They make ratings through a country’s per capita gross domestic product, the level of openness and privatization. I believe these are factors separate from a central government’s debt repayment capability.

I believe the standard for grading a central government’s debt repayment capability should be its fiscal revenue. How well the government can repay debt with its revenue, how regular its revenue comes in, and how big its debt is. These are the most important factors.

With this regard, I believe the U.S. debt repayment capacity is near to zero. Western rating agencies say that the U.S. repayment capacity is sound and the U.S. will never be in default, but those opinions are mostly based on the belief in the power of the dollar. However, quantitative easing has no relation to a country’s repayment capacity. The ratings which failed in 2008 cannot suggest an outlook on the global economy.