On Friday, Standard & Poor’s Ratings Services (S&P) lowered its long-term sovereign credit rating on the United States from AAA to AA+.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” read a report released by the ratings agency. “More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges… The outlook on the long-term rating is negative.”
Moreover, the report also contained further warning of another possible downgrade: “We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
Departing White House Economic Adviser Austan Goolsbee claimed S&P’s downgrade of the U.S.’s sovereign credit rating was based on “questionable mathematics” on NBC’s Meet the Press on Sunday, according to POLITICO.
“They made a $2 trillion math error, and they didn’t check their work,” Goolsbee said.
The $2 trillion figure comes from a draft press release provided to the Treasury by S&P before the downgrade was made official. In a blog post, Acting Assistant Secretary for Economic Policy at the Treasury, John Bellows, explained the alleged error and S&P’s decision to continue with the downgrade when Treasury pointed out the error.
“The error came about because S&P took the amount of deficit reduction CBO [Congressional Budget Office] calculated from the Budget Control Act and applied it to the wrong starting point, or ‘baseline,’” the blog read. “The impact of this mistake was to dramatically overstate projected deficits — by $2 trillion over 10 years. As anybody who has followed the fiscal discussions knows, a change of this magnitude is very significant. Nonetheless, S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment, or even significant enough to warrant another day to carefully re-evaluate their analysis.”