Treasury: Credit Downgrade Based on S&P's $2 Trillion Mistake

Credit reporting agency Standard & Poor’s announced on Friday that because Congress didn’t do enough to fix the country’s debt problem, they dropped the stellar AAA credit rating of the U.S. down by one notch to AA+ with a negative outlook. S&P had warned in April that a downgrade was likely if Congress didn’t deal with the debt ceiling and fixing the budget. The downgrade can increase the cost of borrowing for the U.S., which would eventually trickle down to the consumer.

A Treasury official said that S&P’s initial reason for the downgrade was based on a miscalculation of $2 trillion. John Bellows, Acting Assistant for Economic Policy, said in a blog, “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.”

Bellows said, “The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.”

On Monday afternoon, President Obama addressed S&P’s decision and reassured the nation that the downgrade was not because S&P doubted our government’s ability to pay its debt, but rather because “they doubted our political system’s ability to act.”

Obama said, “The markets, on the other hand, continue to believe our credit status is AAA. In fact, Warren Buffett, who knows a thing or two about good investments, said, “If there were a quadruple-A rating, I’d give the United States that.” I, and most of the world’s investors, agree.”

“And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least,” the President continued. “We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world’s.”

The news of the U.S. credit downgrade was not released after the markets closed on Friday. On Monday, Wall Street plummeted in its worst sell-off since December 2008.

"Investors are having one reaction to the downgrade: sell first and ask questions later," said Paul Zemsky, head of asset allocation with ING Investment Management.



Sources:
Standard & Poor’s
U.S. Department of the Treasury
The White House
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