US lays out argument against S&P downgrade

WASHINGTON – The US Treasury said Saturday that Standard & Poor’s downgrade of the US credit rating was based on a “$2 trillion mistake” and that plans to cut the deficit had met S&P’s standards.

In a post on the Treasury’s website, John Bellows, the acting assistant Treasury secretary for economic policy, said that they demonstrated that the government’s plan would cut the US deficit by more than $4 trillion within 10 years.

That is the amount S&P said in recent weeks was necessary to avoid a downgrade.

But late Friday the agency, rejecting government protests of its calculations, reduced the US rating for the first time ever from AAA to AA+.

Bellows said that S&P had only measured some $2.1 trillion in cuts in its analysis because it used “the wrong starting point”.

According to Bellows, S&P derived the $2.1 trillion from one baseline, or basic budget framework, of the Congressional Budget Office.

But rather than then projecting the country’s debt-to-GDP profile from that same baseline, the agency erroneously applied the $2.1 trillion to a separate baseline that had different assumptions on spending.

That made it come up with a much larger projection for the debt ratio than Treasury says is correct.

In fact, Bellows said, if it had used the right spending cuts with the right baseline, S&P would have seen that the government’s deficit reduction plan signed Tuesday would save more than $4 trillion over ten years, meeting S&P’s own standard for avoiding a downgrade.

“The impact of this mistake was to dramatically overstate projected deficits — by $2 trillion over 10 years,” Bellows said.

“Nonetheless, S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment.”

“Independent of this error, there is no justifiable rationale for downgrading the debt of the United States,” Bellows wrote.

S&P has not directly responded to the Treasury’s criticism, but John Chambers, head of sovereign ratings for the country, said on CNN late Friday that the downgrade was related as much to the country’s debt profile in five years and not 10, the point where Bellows focused.

“We had a discussion over the baseline. We agree with the Treasury’s position on this and our figures that we have published reflect that,” he said.

However, he said, the result was just a small change to the 2015 numbers – that the debt ratio would fall by just 1.5 percent of GDP.

“It doesn’t make a material difference,” he said.

“It doesn’t change the fact that your debt-to-GDP ratio under most plausible assumptions will continue to rise over the next decade.”