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Sunday, August 7, 2011

U.S. blames flawed analysis for S&P downgrade

Stung by the first-ever downgrade to its top-notch sovereign credit rating, the U.S. has hit back at Stanbdard & Poor, saying that the rating agency’s flawed analysis has put its own credibility and integrity at risk.

The U.S. administration has also got support from legendary investor Warren Buffett, who said that the rating downgrade from ‘Triple-A’ did not make any sense and he would rather give the U.S. a ‘Quadraple-A’ rating, if there was one.

The ‘AAA’ rating is the highest possible rating and the world’s largest economy had been enjoying this top-notch rating ever since the agencies began assigning sovereign credit rating to the country. However, S&P this weekend stripped the U.S. off this rating, downgrading it a notch lower to ‘AA+’, while terming the efforts being taken to tackle the country’s soaring debt levels as inadequate.

Reacting to the unprecedented downgrade, the U.S. Treasury Department issued a detailed statement on its website, questioning the credibility and integrity of S&P and terming as misleading and flawed the agency’s analysis for the action.

S&P, however, defended its action through media interactions and said that the U.S. administration’s angry response was on expected lines from any country or company being downgraded.

The Treasury officials have been saying that S&P had erroneously inflated the U.S. deficit figure by over $2 trillion, which they rectified after being alerted to the error but still decided to go ahead with the downgrade.

“S&P acknowledged this error - in private conversations with Treasury on Friday afternoon and then publicly early on Saturday morning. In the interim, they chose to issue a downgrade of the U.S. credit rating,” Treasury statement said.

The head of the White House Council of Economic Advisers, Gene Sperling, also joined in the assault on S&P, saying that it first arrived at a conclusion to downgrade the rating and then decided on the required arguments.

“The magnitude of their (S&P’s) 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. It smacked of an institution starting with a conclusion and shaping any arguments to fit it,” he said.

“After Treasury pointed out this error - a basic math error of significant consequence - S&P still chose to proceed with their flawed judgement by simply changing their principal rationale for their credit rating decision from an economic one to a political one,” Treasury’s assistant secretary for economic policy John Bellows said.

Joining those who did not appear convinced with the rationale for downgrade was Buffett, who holds about $40 billion of the U.S. treasury bonds and is a shareholder in S&P’s rival rating agency Moody’s.

He said that the downgrade did not make any sense and for him the rating was still ‘AAA’ “If there were a quadruple-A rating, I’d give the U.S. that,” he said, while adding that he would not sell U.S. treasury bonds because of downgrade.

The Treasury statement, on the other hand, said that the mistake committed by the rating agency 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.”


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