Amid Criticism on Downgrade, S.&P. Fires Back
A day after Standard & Poor’s took the unprecedented step of downgrading the creditworthiness of the United States government, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a “debacle,” and warning that further downgrades may lie ahead.
In an unusual Saturday conference call with reporters, senior S.& P. officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. “The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S.& P.’s sovereign ratings committee.
Another S.& P. official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”
Administration officials at the White House and Treasury angrily criticized S.& P.’s action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.
The agreement set spending caps in the fiscal year that begins Oct. 1 and calls for a bi-partisan Congressional “super committee” to propose more deficit reduction — for up to $2.5 trillion in combined savings over a decade.
“The bipartisan compromise on deficit reduction was an important step in the right direction,” the White House press secretary, Jay Carney, said in a statement on Saturday. “Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges.”
The ratings agency put additional pressure on the joint Congressional committee to find additional spending cuts, tax hikes or both to bring down the inexorably rising national debt.
Still, the posturing on Capitol Hill continued.
“Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” Speaker John A. Boehner, an Ohio Republican, said in a statement.
Senate Majority Leader Harry Reid said the downgrade affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.
The decision, he said, “shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding.”
Even as the ratings agency insisted on Saturday that its move shouldn’t have come as a shock, it reverberated around the world as political and financial leaders scrambled to assess its impact on the already troubled world economy.
China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the S.& P. downgrade.
While Europeans had girded for a possible downgrade, the news that S.& P. had actually yanked the United States’ AAA rating was nonetheless received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that the figures used by S.& P. didn’t match those of the Treasury, and overstated the federal debt by about $2 trillion.
Mr. Baroin said he found it curious that neither Moody’s nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody’s has said it was keeping its AAA rating on the nation’s debt, but that it might still lower it.
“We have total confidence in the solidity of the American economy,” Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision confirms that the world’s most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.
The lowering of a core financial instrument of the global economy is freighted with symbolic significance, but carries few clear financial implications. The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for local governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have not downgraded the government at this time.
The wrangling over the downgrade to AA+ from AAA stretched over days. S.& P. executives came to the Treasury Department earlier in the week to meet with a group of administration officials led by Mary J. Miller, the assistant secretary for financial markets, who is one of the government’s main liaisons to the rating agencies, according to a government official with knowledge of the meeting.
At the meeting, the S.& P. executives walked the Treasury team through its analysis, the official said. Even then, Treasury officials raised concerns about the methodology. S.& P. pointed out that there were at least three sets of assumptions that could be made to project future growth in government spending, according to the official.
The Congressional Budget Office projects spending in two ways — one that shows Congress increasing spending for the domestic and defense programs it finances annually by the projected rate of inflation, and another that shows spending rising by a higher amount pegged to the expected growth in the nation’s gross domestic product.
The Treasury argued for a third way, that would make sure that whichever so-called base line S.& P. used, it would take into account the spending caps and deficit reduction that Congress and the White House agreed to in the recent debt-limit deal.
Rumors of a potential downgrade started swirling through the financial markets on Friday morning, causing stocks to fall sharply. Although Moody’s and Fitch had affirmed the government’s AAA rating late Tuesday afternoon, S.& P. was silent.
But around 1:30 p.m on Friday, S.& P. sent a memorandum outlining its preliminary position, including specific figures underscoring their argument for a downgrade. Treasury officials were told that S.& P. planned to make its announcement after 4 p.m., when the stock market closes, according to two administration officials.
Treasury officials flagged a concern over how S.& P. crunched the numbers. S.& P. had chosen to assume that government spending grew at the pace of economic growth, rather than rely on numbers that incorporated the new spending limits into its actual budget projection. That is what Treasury officials are now calling a $2 trillion error — and raised the issue with S.& P.
In Saturday’s conference call, the Mr. Chambers said the $2 trillion difference, in one scenario for 2021, equals only about 2 percent of gross domestic product, and doesn’t alter the fundamental reality that the country’s debt burden will continue to rise.
Randy Neugebauer, a Texas Republican who heads the House Financial Services’ subcommittee on oversight and investigations, said that while it was appropriate for S.& P. to consider the political situation in its analysis, it was speculative of it to use predictions of what Congress will likely do in the future as a rationale for a downgrade.
“One thing that puts them out in uncharted waters is trying to predict what the political environment is going to be,” Mr. Neugebauer said. “They’re not predicting an overly cooperative environment in Congress and that’s a very subjective call.”
The ratings agencies, for their part, spent Saturday trying to defend their positions on the nation’s debt. Moody’s and Fitch analysts said Saturday that a downgrade remains a possibility. “Our rating is AAA until the day it changes,” said David Riley of Fitch in London. “That being said, we haven’t formally reaffirmed the rating.”
Moody’s has reaffirmed the AAA, though it put the country on negative watch on Tuesday. The company’s sovereign analyst said Saturday that his company is not as concerned about Washington’s political gridlock.
Steven Hess, a Moody’s analyst, said the debt deal “is not enough, but we thought a downgrade would be premature given that they have come up with a plan for deficit reduction.”
Sources: AP, CNN, Fox News, NY Times, Youtube
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