Treasury explains initial S&P downgrade error

Treasury has been pushing back ferociously against Standard & Poor's for downgrading the U.S. credit rating from AAA to AA+ on Friday night. Key to its attack is the fact, acknowledged by S&P, that the rating agency initially miscalculated the projected effects of the debt-ceiling agreement.

For a full explanation of the errors, look here.

Treasury acting assistant secretary John Bellows explains that S&P underestimated the size of the federal debt in the out years because it took the $2.1 trillion in deficit reduction the debt-ceiling deal achieves and applied it to the wrong baseline.

The Congressional Budget Office (CBO) scored the deal as achieving $2.1 trillion in savings using a baseline that assumed spending grows with inflation. S&P took that number and compared it to a baseline in which spending grows with the size of the economy. Treasury asserts that using that baseline, the debt-ceiling deal actually cuts $4 trillion.

After admitting its mistake, S&P went ahead with the downgrade anyhow and relied more on its political judgment that Washington will not able to agree to a deficit grand bargain achieving at least $4 trillion in cuts against the original CBO baseline.

The S&P downgrade could raise U.S. borrowing costs over time, costing taxpayers hundreds of billions of dollars in added interest. Democrats say the rating means the GOP needs to back down and allow tax increases. Republicans are saying it shows the need for deeper cuts, entitlement reform and a balanced-budget amendment.