S&P Explains Why The “$2 Trillion Error” Is Irrelevant

S&P Explains Why The “$2 Trillion Error” Is Irrelevant

 

Full S&P note:

Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth

 

New York, Aug. 6, 2011. In response to questions, Standard & Poor’s today said that the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth. In the near term horizon to 2015, the U.S. net general government debt is projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption.

 

We used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which includes an assumption that government discretionary appropriations will grow at the same rate as nominal GDP. In further discussions between Standard & Poor’s and Treasury, we determined that the CBO’s Baseline Scenario, which assumes discretionary appropriations grow at a lower rate, would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011.

 

Our ratings are determined primarily using a 3-5 year time horizon.

 

In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion.

 

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).

 

The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.

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Comment by Maria De Wind on August 8, 2011 at 11:10am

US markets fall sharply after S&P downgrade Stocks fall on Wall...

 

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Comment by truth on August 7, 2011 at 11:57am

S&P head: Agency may downgrade U.S. again

 



 

The head of Standard & Poor's sovereign ratings said Sunday that the agency may downgrade the U.S. again.

"Given the economic and political situation in the U.S., which will we see, an upgrading back to AAA or further downgrades?" Fox News' Chris Wallace asked David Beers.

"We have a negative outlook on the rating and that means we think that the risk currently for the rating are to the downside," Beers said.

While explaining what the U.S. could do to get its AAA rating back, the S&P official mentioned entitlement cuts but ignored the agency's call to raise revenues.

"Does any compromise have to have entitlement reform and revenue increases to be credible?" Wallace wondered.

"The key thing is, yes, entitlement reform is important because entitlement is the biggest -- are the biggest component of spending and they are the part of spending where the cost pressures are greatest," Beers replied.

"The White House as you know is not happy with this decision and they have accused S&P of amateurism. They went through your numbers and found a $2 trillion overstatement of what the debt would be and when they pointed that out to you, you simply changed the rational and continued to downgrade the debt," Wallace noted.


"That is a complete misrepresentation of what happened," Beers claimed. "Here we are talking about highly technical assumptions about projecting budget base lines far in the future. We made the motifications that we did after a conversation with the Treasury, it doesn't change the fact that in our estimation, that even with the agreement of Congress and the administration this past week, that the underlying debt burden of the U.S. government is rising and will continue to rise, most likely, over the next decade."

"The haste with which S&P changed its principal rationale for action when presented with this error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action," Treasury assistant secretary for economic policy John Bellows wrote last week.

White House chief economic adviser Gene Sperling added that S&P's actions "smacked of an institution starting with a conclusion and shaping any arguments to fit it."

"The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," he said.

Beers told Wallace that he did not expect "that much impact" from the downgrade when the global markets open on Monday.

Watch this video from Fox's Fox News Sunday, broadcast Aug. 7, 2011.

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