US, S&P, and that AAA

06 August 2011
S&P, much to the annoyance of the US Treasury and the White House, has downgraded the US from AAA (a rating it held since - well pretty much whenever rating agencies were first envisioned) to AA+. It is fairly clear that S&P regard the brinkmanship over the debt ceiling as not something an AAA-rated country should be doing, as even the projected debt-to-GDP figures are still better than what some other AAA-rated countries currently have.

Actually, not the first to downgrade..

That honour goes to Dagong, who already rank the US as a mere A. In the US itself, a small outfit called Egan-Jones had also downgraded the US from AAA beforehand. However a downgrade by one of the big-three cannot be brushed under the carpet.

The Math error

As far as I can tell, S&P used the Alternative Fiscal Scenario calculated by the Congressional Budget Office, but S&P had assumed that spending would increase as the economy grew. However, Congressional Budget Office had assumed spending would increase with inflation. As a result it meant savings as a result of the debt ceiling would be $3,000bn rather than $900bn, and hence the $2trillian discrepancy. As-is I think using the debt ceiling to produce values for expected savings is a bit dodgy, but the point was enough to put S&P on the defensive. Trying to paint it all as a downgrade based on schoolboy errors was pushing it though.

What next?

America being downgraded should worry AAA-rated countries in Europe, and just about everywhere else. And if it happens to them they will not be able to wallpaper over it quite as well as the US has done. France tops that list.