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S&P Downgrade Raises Questions of Credibility, Treasury Says

August 08, 2011

(Adds number of countries with top ranking starting in 21st paragraph. For more on S&P’s downgrade of the U.S. credit rating, see {EXT3 <GO>}.)

Aug. 6 (Bloomberg) -- The Standard & Poor’s downgrade of the U.S. credit rating was unjustified and calls into doubt the credibility of the firm’s decision, a U.S. Treasury official said.

S&P made a $2 trillion “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 today.

The dispute stems from how S&P used figures from the Congressional Budget Office. The discrepancy didn’t change the downgrade decision, S&P 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 time horizon.

S&P reduced the U.S. rating one grade to AA+ while keeping the outlook at “negative,” saying it was less confident 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-based firm said yesterday.

‘Flawed Judgment’

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,” Bellows wrote.

“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 U.S. 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 U.S. on Aug. 2, the day President Barack Obama signed a 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.

‘Positive Step’

Steven Hess, a senior credit officer at Moody’s in New York, said at the time that while the compromise between Obama and members of Congress was “a positive step” toward reducing the deficit, “we do think more needs to be done.”

Treasury Secretary Timothy F. Geithner said in April that the U.S. “absolutely” would retain its AAA rating. He was less certain after the months-long debate in Congress over raising the debt ceiling, telling ABC television on Aug. 1 that “it’s hard to tell” if the U.S. would be downgraded.

“I think this is a good result but a terrible process,” Geithner said. “And again, again, as the world watched Congress step up to the edge of the abyss, it made them really wonder whether this place can work.”

The Treasury was presented with the S&P analysis before 2 p.m. New York time yesterday. Shortly thereafter, Treasury officials spotted the error, a person familiar with the matter said yesterday.

Downgrade Released

The two sides discussed the matter over the next several hours before S&P went ahead and released its downgrade around 8:15 p.m. Just before 9 p.m., a Treasury spokesman said S&P had made a $2 trillion error.

S&P replied a few minutes after midnight with an e-mailed statement from spokesman David Wargin saying the rating was not affected by the “change of assumptions.”

The error occurred because S&P took CBO numbers and applied them to the wrong starting point, or baseline, Bellows said in his blog.

“The impact of this mistake was to dramatically overstate projected deficits -- by $2 trillion over 10 years,” he said.

John Chambers, chairman of S&P’s sovereign rating committee, told CNN television yesterday that S&P accepted the Treasury’s view on the baseline “and our figures that we have published reflect that.”

‘Important Thing’

“The important thing to say in this is that the amounts that we’re talking about, say up to about 2015, you’re talking about 1.5 percent of GDP of difference in your debt,” Chambers said. “It doesn’t make a material difference” because it doesn’t change the fact that the U.S. debt-to-gross domestic product ratio will probably continue to rise in the next decade, he said.

On a conference call today with reporters, Chambers and David Beers, managing director of sovereign credit ratings at S&P, said that in their analysis, the “extremely difficult” political discussions in Washington over how to reduce the more than $1 trillion budget deficit carried more weight in their decision than the nation’s outstanding debt.

In the statement sent after midnight, S&P said it was clarifying “assumptions” involved in its decision.

“The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook,” the S&P statement said. “None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.”

18 Sovereign Entities

S&P currently gives 18 sovereign entities its top ranking, including Australia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt-to-GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in yesterday’s statement.

New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

--Editors: Kevin Costelloe, Christopher Wellisz

To contact the reporter on this story: Ian Katz in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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