US VERSUS S&P's: THE EXTRAORDINARY row between Standard & Poor's and the US administration over the agency's competence and rationale for a downgrade in the US rating from AAA to AA+ has been brewing for months.
The administration accuses S&P not only of numerical incompetence, but of having made an arbitrary decision to downgrade and then changing its arguments to fit that decision after its errors were pointed out.
S&P retorts that the administration is trying to use a detail to discredit its broader argument because it cannot accept how bad Washington’s political dysfunction appears to outside eyes.
The reality seems to be that S&P made a very embarrassing error in the numbers it initially sent to the treasury – one that could have made a substantive difference to its downgrade decision. The administration’s counter-attack, however, is a convenient distraction from S&P’s harsh criticism of the political process.
The path to a downgrade began at the start of the year when S&P came to Washington for an annual round of visits to the treasury, the Federal Reserve and Capitol Hill.
In March, S&P first told treasury it might change its outlook on the US rating to negative, and its analysts came back to Washington in April for another round of meetings. After those meetings, S&P downgraded the US outlook to negative.
Sources familiar with the discussions say S&P was focused on the lack of prospects for any significant fiscal action before the next presidential election in 2012.
One of the administration’s criticisms is that S&P’s timeframe then changed, with the agency saying it needed to see $4,000 billion in immediate deficit reduction from the debt ceiling deal.
S&P says the change was a consequence of the acrimony over the debt ceiling. The discussions culminated in the row over S&P’s decision to downgrade on Friday. Rumours swirled through markets that morning that action was imminent and, at 1.45pm, the treasury received a preliminary press release from the agency. At 3.15pm, treasury notified S&P of the error in its numbers.
S&P’s initial numbers were based on the “alternative fiscal scenario” prepared by the congressional budget office. That assumed that discretionary federal spending would grow in line with the economy. S&P then subtracted the roughly $900 billion in savings created by the debt ceiling deal to estimate net debt.
However, the office had calculated the $900 billion savings from a different baseline, which assumed spending would grow in line with inflation. Calculated from the higher alternative scenario, the budget savings would be closer to $3,000 billion. Adjusting for this would mean net public debt would rise to only 85 per cent of gross domestic product by 2021.
The crucial question is whether the error would have made a substantive difference under S&P’s criteria. The treasury was outraged that, despite acknowledging its error at 5.30pm, S&P went ahead with the downgrade at 8.30pm.
S&P argues the US fiscal score would still be on the borderline even after the change and, more importantly, its doubts about the politics alone would have justified a downgrade. – (Copyright The Financial Times Limited 2011)
