The administration of US President Barack Obama attacked the credibility of the analysis underlying Standard & Poor’s (S&P) decision to downgrade the US’ top credit rating on Friday, saying it had found a US$2 trillion error.
S&P was forced to remove the number from its analysis after US Treasury officials discovered that the ratings agency’s estimates of the government’s discretionary spending was US$2 trillion too high, sources familiar with the discussions said.
There was evident dismay, and some anger, within the Obama administration at S&P’s decision to downgrade US debt despite the errors officials said they had found in the calculations.
“A judgement flawed by a US$2 trillion error speaks for itself,” a Treasury spokesman said after S&P cut the long-term US credit rating by one notch to “AA+” on concerns about growing budget deficits.
The comment marked the first time the US Treasury had publicly chastised S&P. Administration officials have privately grumbled that the ratings agency’s understanding of the US political system was unsophisticated.
David Beers, the top S&P official behind the ratings decision, said in an interview that any change in the ratings agency’s calculations would have been taken into consideration before the decision was made public.
Sources familiar with talks that took place between S&P and the US Treasury on Friday afternoon said the ratings agency had wanted to see US$4 trillion sliced from future budgets as part of a hard-fought deal secured earlier this week to lift the nation’s debt limit. That agreement would reduce deficits by US$2.1 trillion over 10 years.
Even after the error was pointed out, the rating agency declined to hold off on its downgrade, sources said.
With the threat of a downgrade looming, Treasury officials earlier in the week had played down the potential impact and said markets already were aware it was under consideration and that two other agencies were maintaining their triple-A rating.
The US Federal Reserve effectively shrugged off the downgrade, saying it would not affect the operation of the central bank’s emergency lending window or its buying and selling of Treasury securities to conduct monetary policy. The Fed can only extend emergency loans to banks against good collateral.
Treasury officials, who spoke on condition of anonymity, said on Wednesday that top bond dealers were questioning S&P’s credibility, which took a heavy blow during the 2007-2009 financial crisis, when mortgage-related debt lost much of its value after originally being awarded high ratings. The reputations of two other big rating agencies, Fitch and Moody’s, were also tarnished.
Ian Lyngen, a senior government bond strategist at CRT Capital Group in Connecticut, agreed S&P now had more than just a credibility problem.
“The fact that they have now downgraded the United States suggests to me that they are now going to be dealing with a relevance issue,” he said. “Because the fact of the matter is that 10-year [Treasury note] yields are near 2.5 percent, and that in no way suggests a lack of sponsorship for US debt.”
Yields on US 10-year notes, a benchmark for borrowing rates throughout the economy, fell as far as 2.34 percent on Friday — their lowest since October last year and very low by historical standards.