Treasury official faults credit rating downgrade

Says S&P made calculation error of $2 trillion

The Treasury Department, seen in the background, pointed out a $2 trillion calculating mistake to Standard & Poor’s. The Treasury Department, seen in the background, pointed out a $2 trillion calculating mistake to Standard & Poor’s. (Nicholas Kamm/ AFP/ Getty Images)
By Ian Katz
Bloomberg News / August 7, 2011

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WASHINGTON - The Standard & Poor’s downgrade of the US credit rating was unjustified and raises questions about the credibility of the firm’s decision, a Treasury official said yesterday.

S&P made a $2 trillion calculating mistake and then changed the rationale for its decision, raising “fundamental questions about the credibility and integrity of S&P’s ratings action,’’ John Bellows, acting assistant secretary for economic policy, wrote in a Treasury blog post.

The dispute stems from how S&P used figures from the Congressional Budget Office. The discrepancy didn’t change the downgrade decision, S&P officials said, because Treasury’s $2 trillion figure was derived by calculating government debt over a 10-year period while S&P’s ratings are determined using a three- to five-year timetable.

S&P reduced the US rating one grade to AA+ while keeping the outlook at “negative,’’ saying it was less confident that Congress would end Bush-era tax cuts or tackle spending on entitlements.

The rating may be cut to AA within two years if spending isn’t reduced as much as planned, interest rates rise or “new fiscal pressures’’ result in increased general government debt, the New York firm said Friday.

Bellows said that after the Treasury pointed out “the error - a basic math error of significant consequence - S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit-rating decision from an economic one to a political one.’’

“Independent of this error, there is no justifiable rationale for downgrading the debt of the United States,’’ he said. “There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the United States has the means and political will to make good on its obligations.’’

The S&P decision went further than Moody’s Investors Service and Fitch Ratings, which affirmed their AAA credit ratings for the United States on Aug. 2, the day President Obama signed the bill that ended the debt-ceiling impasse that pushed the country to the edge of default. Moody’s and Fitch both said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

With the lending crisis of 2008 still in mind, some critics raised questions about S&P’s actions.

“I find it interesting to see S&P so vigilant now in downgrading the US credit rating,’’ Senator Bernie Sanders, independent of Vermont, said yesterday. “Where were they four years ago?’’

Standard & Poor’s defended its decision, saying it downgraded the credit rating because it believes the US will keep having problems getting its finances under control.

S&P officials said it was the months of haggling in Congress over budget cuts that led it to take the action, not just deficit projections.

David Beers, global head of sovereign ratings at S&P, said the agency was concerned about the “degree of uncertainty around the political policy process. The nature of the debate and the difficulty in framing a political consensus . . . that was the key consideration.’’

S&P was looking for $4 trillion in budget cuts over 10 years. The deal that passed Congress Tuesday would bring $2.1 trillion to $2.4 trillion in cuts over that time.

It is concerned that lawmakers and the administration might fail to make those cuts because Democrats and Republicans are divided over how to implement them. Republicans are refusing to raise taxes in any deficit-cutting deal while Democrats are fighting to protect entitlement programs such as Social Security and Medicare.

The S&P downgrade doesn’t apply to short-term Treasurys - bonds that mature in a year or less - only to long-term government debt. That means the downgrade shouldn’t rattle money market funds that invest in short-term Treasurys, analysts said.

However, the downgrade could hurt the president and members of Congress politically by fueling economic uncertainty and wounding national pride, even if the effect on interest rates is limited, analysts said.

Obama was spending the weekend at the Camp David presidential retreat in the Maryland mountains. White House press secretary Jay Carney said Obama will urge Congress to set aside “political and ideological differences’’ and work for greater deficit reduction and economic recovery.

Republican presidential candidates were quick to criticize Obama after the downgrade.

“America’s creditworthiness just became the latest casualty’’ in Obama’s “failed record of leadership on the economy,’’ said Mitt Romney, former governor of Massachusetts. The downgrade is “a deeply troubling indicator of our country’s decline under’’ the president, he said.

Representative Michele Bachmann of Minnesota said Obama “has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling.’’

House Speaker John Boehner, an Ohio Republican and one of the architects of the deficit reduction plan, reacted to the downgrade by saying, “It is my hope this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our long debt problem.’’

Senate majority leader Harry Reid, a Nevada Democrat who also helped write the plan, said the announcement “reaffirms the need for a balanced approach to deficit reduction that combined spending cuts with revenue-raising measures.’’