S&P credit downgrade blasted by U.S. officials

AsU.S. President Barack Obama remained silent over the decision by credit-rating agency Standard and Poor's to downgrade his country's debt, two administration officials took up thefight Saturday, drubbing the company for what one called a "$2-trillion mistake."

A day afterS&P downgraded the United States's federal debt for the first time ever to AA-plus from the top grade of AAA, details emerged about how the rating agency arrived at its decision, prompting senior administration figuresto sparwith the company over its motives.

'This error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action' U.S. Treasury official John Bellows

John Bellows, assistant secretary for economic policy at the U.S. Treasury, said in a post on the department's blog that, due to an analyticalmixup,S&P had made a "$2-trillion mistake [that] led to a very misleading picture of debt sustainability" in its10-year projections ofU.S. government debt.

When the Treasury Department pointedout the overestimate to S&P on Friday before the rating agency went public with its announcement, instead oftaking "another day to carefully re-evaluate their analysis"itshifted its rationale for the downgrade from an economic one to a political one, Bellows said.

Thefirst draft of S&P's news release announcing the downgrade, a copyof which was sent to Treasury on Friday midday,focused on fiscal concerns, Bellows said. The final published version citesweakened "effectiveness... of American policymaking and political institutions" and "the difficulties in bridging the gulf between the political parties over fiscal policy."

"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," Bellows writes.

White House chief economic adviser Gene Sperlingadded to thechorus ofcondemnation, sayingS&P's behaviour "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," Sperling said.

The math error arose from S&P'smixing uptwo differentscenarioscalculated by the non-partisan Congressional Budget Office to figure out how much government spending will increase in the next decade. The companyadmitted the error in a news release on Saturday, saying its initial 10-year debt projection was indeed $2 trillion US too high.

S&P fights back

Butthe rating agency took the rare step of having its top national-debt experts nevertheless defend their decision in a conference call Saturday with the media. Theysaid it was the months of haggling in Congress over budget cuts that ledthem to downgrade the U.S. rating, particularly because the impassesuggestedthe governmentwon't do much better in the future, even as the U.S. budget deficit grows.

David Beers, global head of sovereign ratings at S&P, said the agency was concerned about the "degree of uncertainty around the political policy process. The nature of the debate and the difficulty in framing a political consensus.... That was the key consideration."

It's unclear what effect the debt downgrade will have on the U.S. government's ability to borrow. Traditionally, a lower rating signals a riskier investment and drives up the interest rate a debtor must pay to borrow money. That could have a huge impact on the American economy by making it more expensive for the government, companies and consumers to borrow money.

But U.S. Treasury bonds arethecornerstone debt instrumentsof the world financial system and unlikely to lose that status. As well, past debt downgrades in some other countries Belgium, Italy and Spain in 1998 and Ireland in 2009 didn't immediately cause interest rates there to rise. And U.S. debtstill enjoys top-grade status from the country's two other major rating agencies, Moody's and Fitch.

Obama's potential opponents in next year's presidential election seized theoccasion Saturday to slam his economic leadership.

Mitt Romney,a former Massachusetts governor andthe frontrunner for the Republican presidential nomination next year, wrote that"America's creditworthiness just became the latest casualty in President Obama's failed record of leadership."

Former Minnesotagovernor Tim Pawlenty chimed in that"what we should be talking about is downgrading Barack Obama from president of the United States." Campaigning in Iowa, Pawlenty said, "We need to have a president who understands what it means to put our full faith and credit in the American people."

Also in Iowa, Representative Michele Bachmann, a Republican from Minnesota, called for Treasury Secretary Timothy Geithner's ouster. Bachman, who voted against thedeadlock-breaking dealearlier this week that saw Congress authorize further borrowing by the Treasury in exchange for major spending cuts, told a reporter, "This president has destroyed the credit rating of the United States through... his inability to control government spending."

The unprecedented downgrading of the U.S. government'scredit also earned the country admonishment from China, the largest foreign holder of American debt,which said Saturdaythat "mounting debts and ridiculous political wrestling in Washington have damaged America's image abroad."