As U.S. President Barack Obama remained silent over the decision by credit-rating agency Standard and Poor's to downgrade his country's debt, two administration officials took up the fight Saturday, drubbing the company for what one called a "$2-trillion mistake."
A day after S&P downgraded the United States's federal debt for the first time ever to AA-plus from the top grade of AAA, details emerged about how the rating agency arrived at its decision, prompting senior administration figures to spar with the company over its motives.
'This error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action' —U.S. Treasury official John Bellows
John Bellows, assistant secretary for economic policy at the U.S. Treasury, said in a post on the department's blog that, due to an analytical mixup, S&P had made a "$2-trillion mistake [that] led to a very misleading picture of debt sustainability" in its 10-year projections of U.S. government debt.
When the Treasury Department pointed out the overestimate to S&P on Friday before the rating agency went public with its announcement, instead of taking "another day to carefully re-evaluate their analysis" it shifted its rationale for the downgrade from an economic one to a political one, Bellows said.
The first draft of S&P's news release announcing the downgrade, a copy of which was sent to Treasury on Friday midday, focused on fiscal concerns, Bellows said. The final published version cites weakened "effectiveness... of American policymaking and political institutions" and "the difficulties in bridging the gulf between the political parties over fiscal policy."
"The haste with which S&P changed its principal rationale for action when presented with this error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action," Bellows writes.
White House chief economic adviser Gene Sperling added to the chorus of condemnation, saying S&P's behaviour "smacked of an institution starting with a conclusion and shaping any arguments to fit it."
"The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," Sperling said.
The math error arose from S&P's mixing up two different scenarios calculated by the non-partisan Congressional Budget Office to figure out how much government spending will increase in the next decade. The company admitted the error in a news release on Saturday, saying its initial 10-year debt projection was indeed $2 trillion US too high.
S&P fights back
But the rating agency took the rare step of having its top national-debt experts nevertheless defend their decision in a conference call Saturday with the media. They said it was the months of haggling in Congress over budget cuts that led them to downgrade the U.S. rating, particularly because the impasse suggested the government won't do much better in the future, even as the U.S. budget deficit grows.
David Beers, global head of sovereign ratings at S&P, said the agency was concerned about the "degree of uncertainty around the political policy process. The nature of the debate and the difficulty in framing a political consensus.... That was the key consideration."
It's unclear what effect the debt downgrade will have on the U.S. government's ability to borrow. Traditionally, a lower rating signals a riskier investment and drives up the interest rate a debtor must pay to borrow money. That could have a huge impact on the American economy by making it more expensive for the government, companies and consumers to borrow money.
But U.S. Treasury bonds are the cornerstone debt instruments of the world financial system and unlikely to lose that status. As well, past debt downgrades in some other countries — Belgium, Italy and Spain in 1998 and Ireland in 2009 — didn't immediately cause interest rates there to rise. And U.S. debt still enjoys top-grade status from the country's two other major rating agencies, Moody's and Fitch.
Obama's potential opponents in next year's presidential election seized the occasion Saturday to slam his economic leadership.
Mitt Romney, a former Massachusetts governor and the frontrunner for the Republican presidential nomination next year, wrote that "America's creditworthiness just became the latest casualty in President Obama's failed record of leadership."
Former Minnesota governor Tim Pawlenty chimed in that "what we should be talking about is downgrading Barack Obama from president of the United States." Campaigning in Iowa, Pawlenty said, "We need to have a president who understands what it means to put our full faith and credit in the American people."
Also in Iowa, Representative Michele Bachmann, a Republican from Minnesota, called for Treasury Secretary Timothy Geithner's ouster. Bachman, who voted against the deadlock-breaking deal earlier this week that saw Congress authorize further borrowing by the Treasury in exchange for major spending cuts, told a reporter, "This president has destroyed the credit rating of the United States through... his inability to control government spending."
The unprecedented downgrading of the U.S. government's credit also earned the country admonishment from China, the largest foreign holder of American debt, which said Saturday that "mounting debts and ridiculous political wrestling in Washington have damaged America's image abroad."