S&P’s downgrade of U.S. sovereign debt from AAA to AA+ though symbolically and politically powerful, was already destined to be met with skepticism in New York and DC. The fact that the beleaguered rating agency managed to make a $2 trillion error in calculating the size of the U.S. debt only made matters worse:
Around 1:30 p.m. [Friday], S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.
S&P said 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.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury representative said.
The ratings firm responded early Saturday Eastern time, saying its decision was not affected by a change of assumptions regarding the pace of discretionary spending growth.
“In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP),” S&P said.
Binyamin Appelbaum and Eric Dash are skeptical at the New York Times, as I was, of the effect of the downgrade. Let’s start with S&P’s own judgment on the effects its downgrade to AA+ would have. In a report last month, the agency said a downgrade to AA+:
would have limited ratings implications for global financial services companies. We do not expect a systemic market disruption under these scenarios. In both, we would expect to take a few rating actions (including outlook revisions) on specific companies, mainly those with businesses, operating earnings, and assets that are largely U.S. based. We don’t expect that a lack of liquidity would be a critical issue or that confidence-sensitive products would experience a run-on-the-bank type stress.
The chart accompanying the report is fairly clear on this point, contrasting the effects (low, moderate or high) of no downgrade in scenario 1, a downgrade to AA+ in scenario tow, and a default (now off the table) in scenario 3:
Moreover, ratings agencies’ credibility stinks thanks to their shoddy assessments of mortgage backed securities that contributed to the 2008 crash. And S&P is an outlier, since Moody’s and Fitch aren’t downgrading the U.S. And most important, from the perspective of economic analysts who decide what price to pay for U.S. bonds in the open market, S&P’s rating’s downgrade doesn’t bring new information: the threat is based on a judgment based on public information about politics in Washington and not the kind of proprietary information S&P gets on businesses whose debt that rate.
The markets know all this, which is why investors have flocked to Treasuries during the recent market uncertainty, keeping rates unusually low.
Which means S&P’s credibility in downgrading the U.S. was already going to be fairly low. Their $2 trillion error means the most significant downgrade last night was the one S&P inflicted on itself.
(For another view based on average interest rates among AAA and AA+ rated countries, see TIME’s Steve Gandel, here.)