Standard & Poor's - Downgrade of U.S. Long-term Credit Rating

Downgrade of U.S. Long-term Credit Rating

On August 5, 2011, following enactment of the Budget Control Act of 2011, S&P lowered the US's sovereign long-term credit rating from AAA to AA+. The press release sent with the decision said, in part:

• " The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
• " More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
• " Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."

The United States Department of the Treasury, which had first called S&P's attention to its $2 trillion error in calculating the ten-year deficit reduction under the Budget Control Act, commented, "The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action." The following day, S&P acknowledged in writing the US$2 trillion error in its calculations, saying the error "had no impact on the rating decision" and adding:

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).