***comment on the S&P downgrade
Reading the account below, the downgrade seems to be a case of showmanship and politics on the part of S&P. Even when they are caught in a $2 trillion error, they refuse to back down, proving their "mojo" lol. They would have had a stronger argument based on "process" ("S&P said the process was very ugly") if they would have pointed to contradictions in the arguments presented by some of the deficit "hawks."
A TREASURY SPOKESPERSON: "A judgment flawed by a $2 trillion error speaks for itself."
BEHIND THE CURTAIN: By noon yesterday, rumors raged through Washington that S&P planned to downgrade the U.S. by day's end. A little before 2 p.m. Friday, after month of increasingly tense back-and-forth between S&P and Treasury, the rating agency provided a draft analysis, ahead of a downgrade announcement that was planned after the markets closed. The draft had some striking headline numbers, and statements like: "We project the U.S. government's debt will grow rapidly through the middle of the decade." The draft said the U.S. government's debt would reach 87 percent of gross domestic product by 2021, under the base case. The sharp eyes on Hamilton Place instantly saw something amiss in the numbers that made them wrong and misleading, and it didn't take long for them to find where S&P had made the underlying mistake. As a result of an error in constructing discretionary spending levels underlying the analysis, the deficit was $2 trillion higher over 10 years than the Congressional Budget Office would estimate. Treasury flagged the discrepancy to S&P, which admitted a mistake.
A REAL KNOCK-DOWN, DRAG-OUT: In the administration's telling, during the course of the Friday discussions, S&P took Treasury officials through some numbers which they quickly pointed out were wrong. S&P then pointed to a table in the agency's criteria from rating, which Treasury also found to be problematic. S&P backed away from THAT and pointed to ANOTHER table that lays out political criteria.
S&P MAKES HUGE SHIFT IN ITS RATIONALE: S&P revised its deficit estimate down by $2 trillion. The share of debt-to-GDP changed substantially due to the correction. In particular, the statement about debt growing as a share of GDP throughout the decade was no longer true. Deficits came down by a significant amount. The trajectory of debt as a share of GDP went from rising to relatively stable. The new document pegs the deficit as a share of GDP at around 79 percent at the end of 2021 - using estimates Treasury believes are conservative. (A goal of fiscal policy is a stable debt-to-GDP ratio.) A rating agency compares a sovereign to other countries, and looks at trajectories and the forward path. The administration argues that all that changed, with the correction that was made. The administration contends that S&P removed some of the numbers from the analysis, and the justification became largely political - a very difficult framework for credit analysts to base a rating on. The earlier draft was much more numerically grounded, and the later one was much more politically grounded -- judgments about political climate. The administration will tell you there was NO ECONOMIC JUSTIFICATION for what S&P put out.
CITING U.S. DYSFUNCTION: One of the administration's fundamental differences with the decision is that S&P focused more on the PROCESS that got to the debt-limit increase, rather than the outcome. At the end of the day, the votes were resoundingly in favor of raising the debt ceiling, and they were bipartisan votes. S&P said the process was very ugly, and the administration wanted a decision that was fact-based: The U.S. made measurable progress from the beginning of this year to Aug. 2, where there is now a plan for meaningful deficit reduction, and an extension of the debt ceiling that should take us to 2012. And the super-committee will look at the full set of options. Those are very meaningful changes. And to have all of that happen and then within a couple days have a RUSH TO JUDGMENT on a downgrade, is surprising.
YA CAN'T MAKE IT UP: Treasury pushed back, pressing S&P to hold off on the announcement: Take some time, take a deep breath, some real flaws have been uncovered, let's be careful, this is important to get right, not to RUSH TO JUDGMENT. According to the administration, S&P said it was going ahead with the announcement because the news media were expecting it! In their view, they had promised something, and they seemed to be extremely interested in going out with it.
GOTCHA: S&P said it was disappointed that there was not another $1.5 trillion in the debt deal, the Budget Control Act. But when Treasury pointed out a $2 trillion mistake, S&P said that wasn't dispositive. The administration points out that's INCONSISTENT.
THE ADMINISTRATION THINKING, according to a source familiar with the matter: THE WORK THAT WENT INTO THIS DOES NOT INSPIRE CONFIDENCE, given that each time they talked, there was a different rationale, and the numbers underpinning the decision seemed to retreat. There's a LACK OF CREDIBILITY in making this decision now, and the timing around it. The administration fundamentally disagrees with the assessment, and is surprised by the timing of it. S&P has had a strong bias for a downgrade for some time, but the country is in a significantly different position than it was six weeks ago. The administration believes the analysis was done in great haste: The mistake reflects a rush to judgment. And S&P did not allow time for the country to follow the legislative path for fiscal adjustments laid out in the debt-ceiling deal, and to see what the markers that come out this fall.
HOW MARKETS WILL REACT: The administration notes that there was not a dramatic reaction to some earlier S&P statements, such as the April decision to put the U.S. on a negative outlook, or further statements in July. The administration isn't making forecasts, but thinks that as long as the U.S. continues to hold a triple-A rating from the other two major agencies -- Moody's and Fitch - the markets should be OK. The markets are probably more focused on the economy and the path of interest rates from economic data, than from this. Everything the ratings agencies have is already in the public domain, and the collective judgment of all the traders judging our creditworthiness every single minute is that the U.S. is still very creditworthy. That's part of the reason you see interest rates at historic lows. As S&P ramped up its rhetoric in mid-April, suggesting the downgrade was a strong possibility, 10-year Treasury yields are down. So far, the markets have taken this in stride. |
