U.S. Will Roll Out QE3 After S&P Rating Cut

U.S. Will Roll Out QE3 After S&P Rating Cut, Li Daokui Says

August 6, 2011

Bloomberg - The U.S. Federal Reserve will extend its program to purchase the nation’s debts and stabilize long- term interest rates after Standard & Poor’s downgraded its credit rating, according to an adviser to China’s central bank.

The Fed will roll out quantitative easing 3, a tactic to purchase treasuries, Li Daokui, an adviser to the People’s Bank of China, wrote in his microblog weibo.com. Institutional investors will be forced to sell long-term U.S. debt, which may cause financial turbulence, he wrote.

S&P lowered the U.S. rating one level to AA+ from AAA for the first time yesterday while keeping the outlook at “negative,” citing the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits. The rating may be cut to AA within two years if spending reductions are lower than agreed to, said the New York-based rating firm.

The U.S. must address its “structural debt problems” and ensure the safety of China’s dollar assets, the state-run Xinhua News Agency said in a commentary today. China is the biggest holder of U.S. debts.

“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” Xinhua said in the commentary. S&P’s decision is “telling the global investors the ugly truth.”

Chinese Foreign Minister Yang Jiechi said yesterday the risk of a U.S. sovereign debt default is increasing, according to an interview he gave to Polish media and posted on the ministry’s website.

Rating Cut ‘Reasonable’

Yang said he hoped the U.S. will conduct a “responsible” monetary policy and guarantee the security of other countries’ U.S. assets.

Credit rating agencies should have the courage to speak the truth, Li wrote in his blog.

The lowering of U.S. long-term debt by S&P is “reasonable,” because U.S. politics may repeatedly cause crises over the debt limit and budget, sacrificing the country’s ability to pay its debt, Li wrote.

China’s Dagong Global Credit Rating Co. cut the U.S.’s sovereign rating one level to A from A+ on Aug. 3, saying the agreement to raise the debt ceiling will precipitate a crisis in the nation.