Little Changed After US Debt Downgrade

NEW YORK—Last Friday’s downgrade of U.S. long-term debt from AAA to AA+ by credit ratings firm Standard & Poor’s may further unnerve investors, which have already sent the U.S. financial markets down almost 6 percent over the last week.

“The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned,” Nikola Swann, analyst at S&P, said in a research report.

In effect, S&P slammed the U.S. government’s political brinksmanship, especially from the Republican Party, for delaying the debate on raising the U.S. debt ceiling.

“In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging,” Swann said.

To S&P, politicians used the debt-ceiling debate as a political tool for political gain, instead of resolving the nation’s longstanding debt issue.

Credit rating agencies Moody’s Investors Service and Fitch Ratings affirmed the nation’s AAA rating last week, and S&P broke rank with its fellow ratings agencies. The move from S&P is not unexpected. S&P in recent weeks has said that a downgrade is likely if Congress cannot come up with a viable solution to bridging the nation’s finances, or if Congress’s solution is not as comprehensive or specific as S&P deems adequate.

Difference of Opinion

The U.S. Treasury criticized S&P in its decision, arguing that the ratings agency may have based its conclusions on erroneous calculations, which contained a $2 trillion error. “After Treasury pointed out this 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,” said Treasury Department’s John Bellows in a statement.

A White House spokesman, over the weekend, also said that President Barack Obama did not agree with S&P’s decision.

But looking closer at the S&P report, one can see that the $2 trillion discrepancy between the Treasury and S&P is not a math error, but more a difference of opinion in projecting U.S. public spending.

In S&P’s original calculations, it assumed that U.S. federal spending would increase by around 5 percent per annum if no further debt and spending reduction measures were taken. In its revised report after speaking with Treasury officials Saturday morning, S&P revised annual spending growth down to 2.5 percent, which generates a net difference of around $2 trillion over 10 years.

Economist Paul Krugman, in a blog posting, railed against S&P and said that the credit rating agency was unqualified to pass judgment as the agencies already once failed the public by giving subprime mortgage-backed securities AAA ratings before the financial crisis.

Billionaire investor Warren Buffett, appearing on Bloomberg Television in an interview with Betty Liu, said S&P made a mistake, and that the U.S. debt should have a "Quadruple-A" rating.

Others say that a downgrade is long overdue, given the amount of debt on the nation’s balance sheet.

“Just like how S&P and Moody’s didn’t downgrade subprime CDOs until the mortgage-backed bonds they held were practically worthless, S&P waited for U.S. debt obligations to reach five times GDP and for the U.S. dollar to lose 84 percent of its purchasing power over the course of a single decade,” said the National Inflation Association in a statement.

“The U.S. was a hair away from defaulting on its debt this week if the debt ceiling wasn’t raised, yet it still had a AAA rating.”

Either way, it is up to S&P to determine, in its view, whether Congress’s agreed spending reductions and projected revenues are enough, and whether it believes the “AAA” rating for U.S. debt is warranted. And to S&P, the United States should not have “AAA” rating. After all, a credit rating is just that—a rating issued by a credit rating agency, which could differ from another credit rating agency because their opinions and views differ.