Standard & Poor’s decision to downgrade the U.S. credit rating was flawed by a $2 trillion error, according to a Treasury Department spokesman.
S&P lowered the nation’s AAA credit rating one level to AA+ yesterday, after warning on July 14 that it would reduce the ranking in the absence of a “credible” plan to lower deficits even if the nation’s $14.3 trillion debt limit were lifted. The outlook was kept as “negative.”
The Treasury disagreed with S&P’s assessment and judged the analysis was carried out hastily, said a person familiar with the matter who declined to be identified because the discussions were private. The ratings firm erred in estimating discretionary spending levels at $2 trillion higher than what the Congressional Budget Office estimates, the person said.
S&P, in a statement, disputed the Treasury’s calculations. It said it lowered its estimate of discretionary spending by $345 billion after discussions with the Treasury, and that the change didn’t affect its decision to lower the credit rating.
“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 firm 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.”
The ratings company, in its earlier statement explaining the downgrade, said that the deficit-cutting plan signed by President Barack Obama this week after months of wrangling with Congress falls short of what “would be necessary to stabilize the government’s medium-term debt dynamics.”
After being alerted to that, S&P lowered its calculations by $2 trillion and then relied largely on judgments about the U.S. politics to support the downgrade, the person said. The Treasury was presented with the S&P analysis shortly before 2 p.m. yesterday.
S&P said in its statement that it may lower the long-term rating to AA within the next two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt.
The wrangling over raising the nation’s debt ceiling indicates that “further near term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process,” S&P said.
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