S&P Pantsed by US Treasury

August 7, 2011

1-minute read

I have been reluctant to condemn the credit-rating agencies for sovereign downgrades because it seemed like shooting the messenger. As the bond markets have noticed, a few European countries have serious fiscal problems. Blaming the raters for also noticing did not seem like an effective response.

However, I think that Standard and Poor’s decision – alone among the major raters – to downgrade the US has severely discredited the agency (bad pun intended). The US Treasury has posted a stinging note about a calculation mistake underlying this decision. Interestingly, the magnitude of S&P’s error was equal to the amount by which it judged the US deficit-reduction plan to fall short: $2 trillion over ten years.

Paul Krugman emphasizes the amateurish nature of S&P’s mistake. But what strikes me is that, when Treasury officials pointed out the error, the agency just changed its main rationale for the downgrade and immediately proceeded with the public announcement. It seems that S&P had made up its mind and did not want to be confused by the facts.

A few commentators have tried to defend S&P by claiming that its initial assumptions were as legitimate as, or more realistic than, the Treasury’s assumptions. I am no expert on American budgeting, but I do not think that is the issue.

My reading of the Treasury’s post is that S&P costed the deficit deal based on one assumed baseline and then subtracted the result from a different baseline. Doing so would be wrong, whichever baseline is right.

  • Erin Weir is Senior Economist with the International Trade Union Confederation and a CCPA Research Associate.

UPDATE (August 7): Andy Watt from the European Trade Union Institute has more.

UPDATE (August 8): Krugman has more.

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