S&P Downgrades U.S. Credit Rating from AAA

The US Treasury has hit back against a Standard and Poor's downgrade of its AAA credit rating, saying there was a $2 trillion dollar error in the agency's calculations. "A judgment flawed by a 2 trillion dollar error speaks for itself," a Treasury spokesman said, just after the US lost its AAA rating for the first time ever and was downgraded to a AA+. It was the first time the US was downgraded since it first received a triple-AAA rating from Moody's in 1917; it has held the S&P rating since 1941. Moody's and a third ratings agency, Fitch, say they continue to study the deficit plan to see if the US merits being kept in their ranks of AAA countries. Earlier, an official close to the discussions with S&P said: "There are deep and fundamental flaws with the S&P analysis." - U.S. Treasure Claims $2 Trillion Error in S&P Calculations, AFP, August 5, 2011

S&P's $2 Trillion Error Didn't Change Rating Cut Decision

August 6, 2011

CNBC - Told they had a $2 trillion error in their calculation of US deficits over a 10-year period, Standard and Poor’s scrambled in the afternoon Friday to reconsider its historic decision to downgrade the United States government. Sources familiar with the situation say S&P had to rouse several of its European committee members from bed to hold an emergency conference call as markets headed toward their close in the US.

The outcome: the agency affirmed the decision the committee had made just that morning, yanking its triple-A rating from the United States and downgrading it one notch to AA+.

The error and the time the ratings agency took to reconsider its downgrade are among the controversies surrounding the ultimate decision to downgrade the United States, which has held the agency’s top triple-A rating since 1941.

Also at issue is whether the new data shows the US eventually meeting the S&P’s criteria of a sustainable deficit level and whether the agency should have included state and local government debt in its rating of US sovereign debt. Neither side provided the data Friday evening that was at issue.

What is not at issue is that sometime in the early afternoon Friday, S&P informed the US Treasury that its committee had decided to downgrade US sovereign debt. Ratings agencies typically inform issuers of their decision before a press release is issued. But US officials quickly noticed an error in the agency’s calculations. This resulted in a change in the projected debt to GDP ratio. Instead of the 87 percent in 2021 miscalculated by S&P, it should have been 79 percent, a roughly $2 trillion mistake.

Neither side disputes the error.

But there are different versions of how long S&P then took after learning of its mistake to reconsider its downgrade. One source familiar with thinking inside the government says officials were stunned when S&P returned just an hour or two later and told them they were going ahead with the downgrade despite the mistake. The source says this suggested the agency was committed to the downgrade regardless of the data. The source adds that the new data showed the US achieving a sustainable deficit in the ten-year window.

Yet, a person familiar with the thinking in S&P said the agency took considerably more time and carefully considered the new information. It went to great lengths to convene its entire committee and consider the matter. This person says the conclusion was the same: while the rate of the growth in debt slowed and was lower than first calculated, it never stopped growing and became sustainable, the criteria by which S&P had said last month it would judge the US. It had said it was looking for $4 trillion of cuts but the debt ceiling deal produced only about $2.7 trillion.

S&P did not release data with its press release on Friday. But Amid the controversy, it put out a statement after midnight saying that it's primary focus in judging creditworthiness is 3 to 5 years, not 10 years.

In that time frame, the error only added 2 percentage points to the debt to GDP tatio, or about $350 billion.

"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 statement said. "None of these key factors was meaningfully affected by the assumption revisions ..."

What the data will show is that S&P’s review of the United State sovereign debt includes state and local debt. This is commonplace around the world because in many countries local debt is centralized through the national government. But government sources say this is not the case in the US because state and local municipalities have their own political and taxing authority to raise debt. No deal in Washington can change the amount of state and local debt issued or retired.

S&P contends that it’s appropriate when judging the creditworthiness of a country to include all the government debt since its all paid by the same taxpayers. Still, it acknowledges that its methodology means an additional 1 percentage point of debt to GDP when compared to calculating just the Federal government alone.

S&P says it had ample time to consider the situation, even though a deal to raise the debt ceiling was only struck on Tuesday. Sources familiar with the matter say Treasury officials wonder what the rush was and question whether the ratings agency had sufficient time to crunch the data. They suggested the error made by the agency shows it did not.

S&P Issues Unprecedented Downgrade of U.S. Credit Rating, Saying Debt Package Falls Short

August 5, 2011

AP - The United States has lost its coveted top AAA credit rating.

Credit rating agency Standard & Poor's on Friday downgraded the nation's rating for the first time since the U.S. won the top ranking in 1917. The move came after Congress haggled over budget cuts and the nation's borrowing limit -- and failed to cut enough government spending to satisfy S&P. The issue has contributed to convulsions in financial markets.

The drop in the rating by one notch to AA-plus was expected. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. S&P said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation. Moody's said Friday it was keeping its AAA rating on the nation's debt, but that it might still lower it.

One of the biggest questions after the downgrade was what impact it would have on already nervous investors. Many financial analysts said investors were expecting a downgrade. But some selling was expected when stock trading resumed Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.

"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest raid paid on U.S. bonds, notes and bills would have to rise to attract buyers. However, even without its AAA rating, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't being scared away this week. While stocks were plunging, investors were buying Treasurys. The yield on the 10-year note, which moves opposite its price, fell to a low of 2.39 percent on Thursday.

The government fought the downgrade. Administration sources familiar with the discussions contended that the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.

In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."

S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade to AA would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make higher interest rates or new fiscal pressures during this period.

In its statement, S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.

S&P said it was now "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon."