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S&P Downgrades U.S. Debt

August 8, 2011

Standard & Poor’s decision to lower the rating on U.S. debt from AAA to AA+ after the debt limit deal generated a lot of heat in Washington, with the political parties blaming each other, and administration officials pointing the finger of blame at S&P.

After noting that S&P had made a $2 trillion miscalculation but still went ahead anyway with a downgrade, one administration official was quoted as telling NBC News, “It’s amateur hour at S&P.”

Treasury Secretary Tim Geithner also assailed the credit rating agency, saying on CNBC on Sunday, “S&P has shown really terrible judgment and they’ve handled themselves very poorly. And they’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement.”

S&P pushed back at the scorn heaped on them in Washington, pointing out why the change in assumptions about discretionary spending growth should not have affected their rating decision.

“The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook,” said the agency. “None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.”

The other two ratings agencies, Fitch and Moody’s, have retained their AAA ratings for U.S. debt for now, but said last week after the debt deal that the outlook was negative. Meanwhile, futures on Monday morning appeared to be tumbling, and Asian markets slid overnight.

The downgrade could lead to higher interest rates and borrowing costs not onlly for the U.S. government, but for accountants and their clients.

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