Treasury: S&P's move based on $2T error in calculations of spending

By Peter Schroeder - 08/05/11 09:46 PM ET

The decision by Standard & Poor's to downgrade the United States's credit rating for the first time in its history came after hours of debate with government officials and despite staunch critiques from the same.

The Treasury Department immediately pushed back against the move by Standard & Poor's to knock the nation's rating down from AAA to AA+, accusing the rater of having major calculation errors that threw the firm's entire rationale into doubt.

"A judgment flawed by a $2 trillion error speaks for itself," said a Treasury spokesperson.

S&P said its decision to downgrade the nation's debt was in response to an insufficient deal to raise the debt limit, coupled with the heightened political brinkmanship that characterized that debate.

Rumors of an imminent downgrade from S&P rattled stock markets early in the day, and the firm notified the Treasury Department around 2 p.m. of its intentions to downgrade the nation's debt, according to a source familiar with the matter.

However, after being presented with S&P's economic rationale for the downgrade, Treasury officials immediately pointed out a perceived error in the analysis, which found it had pegged discretionary spending levels at $2 trillion too high, compared to analysis from the Congressional Budget Office. That calculation error resulted in a much higher growth rate of the nation's debt-to-GDP ratio.

S&P acknowledged the error, and removed that portion of the analysis from its statement, but the firm ultimately decided later Friday evening to move forward with the downgrade, the source said.

The source added that S&P told Treasury it was moving forward with the announcement because the media was expecting one.

While the historic downgrade will deliver a psychological blow, the market response to the downgrade remains unknown, as the move came after markets had closed for the week. The source noted the turmoil could be muted, given that the two other major raters — Moody's Investors Service and Fitch Ratings — had already confirmed the nation's AAA rating in the wake of the debt deal.

For their part, U.S. banking regulators quickly responded to the downgrade, announcing that for all risk-based capital purposes, Treasury debt is not considered any riskier as a result of the move, nor is any debt backed by the government or government-sponsored entities.