Obama officials attack S&P's credibility after downgrade

(Reuters) - The Obama administration attacked the credibility of the analysis underlying Standard & Poor's decision to downgrade the United States' top credit rating on Friday, saying it had found a $2 trillion error.

S&P was forced to remove the number from its analysis after Treasury officials discovered that the rating agency's estimates of the government's discretionary spending was $2 trillion too high, sources familiar with the discussions said.

There was evident dismay, and some anger, within the Obama administration at S&P's decision to downgrade U.S. debt despite the errors officials said they had found in the calculations.

"A judgment flawed by a $2 trillion error speaks for itself," a Treasury spokesman said after S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.

The comment marked the first time the U.S. Treasury had publicly chastised S&P. Administration officials have privately grumbled that the rating agency's understanding of the U.S. political system was unsophisticated.

David Beers, the top S&P official behind the ratings decision, told Reuters in an interview that any change in the rating agency's calculations would have been taken into consideration before the decision was made public.

Sources familiar with talks that took place between S&P and the U.S. Treasury on Friday afternoon said the rating agency had wanted to see $4 trillion sliced from future budgets as part of a hard-fought deal secured earlier this week to lift the nation's debt limit. That agreement would reduce deficits by $2.1 trillion over 10 years.

Even after the error was pointed out, the rating agency declined to hold off on its downgrade, sources said.

With the threat of a downgrade looming, Treasury officials earlier in the week had played down the potential impact and said markets already were aware it was under consideration and that two other agencies were maintaining their triple-A rating.

The Federal Reserve effectively shrugged off the downgrade, saying it would not affect the operation of the central bank's emergency lending window or its buying and selling of Treasury securities to conduct monetary policy. The Fed can only extend emergency loans to banks against good collateral.

PLENTY OF FINGER POINTING

Treasury officials, who spoke on condition of anonymity, said on Wednesday that top bond dealers were questioning S&P's credibility, which took a heavy blow during the 2007-09 financial crisis when mortgage-related debt lost much of its value after originally being awarded high ratings. The reputations of two other big rating agencies, Fitch and Moody's, were also tarnished.

Ian Lyngen, a senior government bond strategist at CRT Capital Group in Connecticut, agreed S&P now had more than just a credibility problem.

"The fact that they have now downgraded the United States suggests to me that they are now going to be dealing with a relevance issue," he said. "Because the fact of the matter is that 10-year (Treasury note) yields are near 2.5 percent, and that in no way suggests a lack of sponsorship for U.S. debt."

Yields on U.S. 10-year notes, a benchmark for borrowing rates throughout the economy, fell as far as 2.34 percent on Friday -- their lowest since October 2010 and very low by historical standards.

POLITICAL POINT SCORING

Lawmakers used the downgrade to square off over how best to rein in the nation's budget gap, with Democrats saying more revenue was needed and Republicans focusing on spending cuts.

S&P's action "reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures," said Senate Majority Leader Harry Reid, a Democrat from Nevada.

House of Representatives Speaker John Boehner, a Republican from Ohio, called the downgrade "the latest consequence of the out-of-control spending that has taken place in Washington for decades."

Sen. Jim DeMint, a leading conservative, went further, saying Treasury Secretary Timothy Geithner should resign.

The White House maintained silence, but Dan Pfeiffer, Obama's communications director, signaled the administration's strategy -- to put the blame on the Republicans -- when he added bits of media commentary to his Twitter.com feed, an increasingly common vehicle for transmitting the White House viewpoint.

One "retweet" he sent from a Washington Post columnist said, "This didn't happen because an earthquake wrecked our factories or a plague hit our workers. It was Congress. Particularly (Republicans)in Congress."

Another "retweet" from a Fox News reporter read: "Remember President Obama pushed for a 'Grand Bargain' that would have cut approximately $4 trillion in debt, but Speaker John Boehner walked."

A Republican-led congressional panel is probing whether the administration had tried to influence S&P before the rating agency revised its outlook on the U.S. debt rating to negative in April.

United States loses prized AAA credit rating from S&P

(Reuters) - The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday in an unprecedented blow to the world's largest economyin the wake of a political battle that took the country to the brink of default.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.

"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," S&P said in a statement.

The outlook on the new U.S. credit rating is "negative," S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.

The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the U.S. dollar's reserve currency status.

"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co which oversees $1.2 trillion in assets.

The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.

The S&P 500 stock index fell 10.8 percent in the past 10 trading days on concerns that the U.S. economy may be heading into another recession and because the European debt crisis has worsened.

Treasury bonds, once indisputably seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

U.S. TREASURY QUESTIONS CALCULATION

Obama was briefed earlier in the day regarding S&P's intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.

Late on Friday, the Treasury said the rating agency's debt calculations were wrong by some $2 trillion.

S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.

"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers, head of sovereign ratings at S&P, told Reuters.

The theme running throughout S&P's analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.

The agency said that policymaking and political institutions had weakened in the past few months "to a degree more than we envisioned." This has major implications for the nation's budget and debt problems.

For example, S&P now assumes that tax cuts brought in under President George W. Bush in 2001 and 2003 would not, as planned, expire by 2012 because of staunch Republican opposition to any measure that would raise revenues.

The compromise reached by Republicans and Democrats this week calls for creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

'DAUNTING' IMPLICATIONS

While the downgrade is a blow to U.S. prestige, it was largely expected and may not have a big impact on trading of U.S. Treasuries and other assets when markets reopen in Asia on Monday.

In fact, Treasuries have rallied this week, driving the yield on the benchmark 10-year note to 2.34 percent, its lowest level in about 10 months. This reflects a belief among investors that U.S. government debt is still a safe bet at a time when prices of stocks and commodities are falling on concern about slowing global economic growth.

"To some extent, I would expect when Tokyo opens on Sunday, that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

But the downgrade has implications for the country's financial sector, ranging from insurance companies to government-related firms such as housing financiers Fannie Mae and Freddie Mac.

"At least initially, the impact on the market will be negative because there will some forced liquidation of U.S. assets," said Boris Schlossberg, GFT director of currency research.

The downgrade could add up to 0.7 of a percentage point to Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

The Federal Reserve and other bank regulators moved on Friday to reassure global markets that the downgrade would not mean that additional capital would be needed by banks and other institutions holding Treasury securities.

The Fed also said the cut would not impact the operation of its emergency lending window for banks, nor its buying and selling of Treasury securities to conduct monetary policy.

The impact of S&P's move was tempered by Moody's Investors Service's decision earlier this week confirming, for now, the U.S. Aaa rating. Fitch Ratings said it was still reviewing its AAA rating and would issue its opinion by the end of the month.

S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problems.

"China will be forced to consider other investments for its reserves. U.S. Treasuries aren't as safe anymore," said Li Jie, a director at the reserves research institute at the Central University of Finance and Economics.

One currency strategist, however, did not think there would be wholesale selling by foreigners.

"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the Treasury market in terms of depth and liquidity," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

He said there was likely to be weakness in the U.S. dollar but a sharp sell-off was unlikely.

S&P had already placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the fiscal deficit of about $1.4 trillion this year, about 9.0 percent of gross domestic product, one of the highest since World War II.

But Obama administration officials grew increasingly frustrated with the rating agency during the debt limit debate and accused S&P of moving the goal posts in its downgrade warnings, sources familiar with talks between the administration and the agency have said.

The downgrade was immediately pounced on by candidates vying for the Republican presidential nomination. Mitt Romney said the move was "a deeply troubling indicator of our country's decline under President Obama," while Jon Huntsman said it was due to spreading of a "cancerous debt afflicting our nation."

The downgrade, 15 months before the next presidential election, and debt will be top campaign issues..

Americans wonder where the misery will end

(Reuters) - America is on the fritz.

From Times Square to St. Petersburg, Florida, and Portland, Oregon, people are trying to understand how the downgrading of America's AAA credit rating by Standard and Poor's agency caused a stock market crash and torpedoed their economic prospects so badly again.

Out of work, unable to sell their homes and with bills piling up, many wonder how they will make ends meet.

"My fridge is on the fritz, my washing machine is on the fritz, my oven is on the fritz, my roof is on the fritz," said Maria Thuy of Jenkintown a suburb of Philadelphia, who lost her job as a director of a non-profit a few weeks ago and wonders how she will stop her house falling down around her.

Like many, Thuy looked on in horror as the stock market crashed on Monday and she fears for her retirement savings.

Barbara Barak, 32, has a job selling cosmetics in an Orlando, Florida mall. But working largely on commission and with business "nonexistent," she may resign.

"People are afraid to spend money," she said.

Since her husband lost his steel industry job at the start of the 2008 recession and took a job with an ice cream maker, their annual income has fallen by $50,000. She could care less about the stock market because she has no savings.

Her financial plan? "Just survive."

On Monday, panicked selling resulted in the S&P 500's worst day since December 2008, down more than 6 percent with every stock in the benchmark index ending in negative territory.

PSYCHOLOGICAL IMPACT

Concern that Washington can't control rising debts or create enough jobs to spur growth contributed to the crash as did the loss of America's pristine AAA credit rating. Rising fears about Europe's debt woes made matters worse.

The S&P 500 is down 17.9 percent from its late April peak.

Consumer spending makes up about 70 percent of the U.S. economy and economists fear steep stock declines will have a psychological impact on households, causing them to cut spending, and force businesses to defer hiring and spending.

Miami store clerk Antonio del Valle said he blamed former President George W. Bush for the current woes. "If he hadn't wasted all that money on the wars in Iraq and Afghanistan, we wouldn't be discussing the debt ceiling," he said.

A decade of war in Afghanistan and eight years in Iraq have hurt the national budget and the 2008 financial crisis, with its resulting bailouts to stop a global financial collapse, led to less aid flowing from Washington to U.S. states.

As a result, working Americans were squeezed as U.S. states and municipalities hiked charges on everything from water to property taxes. Meanwhile, with inflation low and unemployment high, employers cut jobs, kept pay raises to a minimum and passed on soaring health insurance costs to employees.

Sammy Rubin, a 64-year-old electrical contractor in Birmingham, Alabama, blames politicians. A self-described conservative, he said he was angry at recent political fighting over the debt ceiling.

"If I had the power, I would freeze every congressman's bank account ... and make them go get a job, to see what it's like out here. And I wouldn't care if the whole government shut down, except for the military," he said.

The debt debate in Congress has strengthened the case of those who think the two-party system is failing. According to a CNN poll last week, 77 percent of Americans say that elected officials in Washington have behaved "like spoiled children" in the tug-of-war over raising the debt ceiling.

Josh Greenwood, a 24-year-old, who moved from California to New York and is working as a bartender, urged President Barack Obama to end partisan fighting in Washington.

"Obama needs to use his power and influence to get everyone on the same page," he said.

Susan Knight-Allen, a 55 year-old medical social worker, was getting her hair cut at a salon in the Hollywood neighborhood of Portland, Oregon.

"Maybe this time it is not going to correct," she said of the stock market. She and her partner put their money into cash two years ago and now she wonders if she can help, perhaps by getting some backyard work done.

"We have the money and somebody could probably really use that job," she said.

"HANGING ON"

Rachelle Markley, 48, worked at her nearby store Second Glance Books. The second-hand book store is cozy but, she says, "I am hanging on by the skin of my teeth."

As well as a weak economy, her business is suffering as sales shift to e-books. After an employee left in January, she left the job unfilled, leaving her overworked and alone.

Antoine Sykes, a 37-year-old security officer and doorman on Chicago's west side said he fears for his financial security and plans to save what he can, but doesn't trust the banks. "I'm leaving it under my bed or in my grandmother's closet."

Matthew Tavares, 43, and his wife Julia, 31, want to sell their home in the beach community of Marshfield, south of Boston. On the market for a year already, they worry they will have to drop the price more to sell it and will have to use their savings to cover their eventual losses.

The country's latest financial woes have also compounded the concerns of 51-year-old Harry Crown, a commercial painter in St. Petersburg, Florida. He says he lives paycheck to paycheck and expects to get laid off soon due to lack of work.

"It's scary," said Crown, nursing a pitcher of Miller beer at a bar. "You can't get ahead. You live to survive."

Another customer, 65-year-old Roger Dyke agreed. "The country's in a mess," he said. "I don't know any way of fixing it."

Debt deal in sight, now a battle over public perceptions

WASHINGTON — President Barack Obama and congressional leaders have stitched together an agreement to prevent a national default, provided that their 11th-hour deal does not fracture today, but the epic budget battle has failed to resolve another question: Which party can be better trusted to govern?

The president, with his re-election on the horizon, emerges from the showdown in a diminished state after giving considerable ground and struggling to rise above a deep partisan intransigence that has engulfed Washington.

And Republican leaders, especially House Speaker John Boehner, are bruised after navigating the intractable sentiment of the tea party movement.

A full victory lap was not expected — or, perhaps, deserved — by those on either side of the debate, which has consumed the capital, unnerved the financial markets and infuriated the American public. Yet even as a compromise was announced Sunday evening, both parties were prepared to try to define the deal as staying true to their respective principles.

How well each of them does in shaping perceptions of the outcome could have a substantial effect on the presidential race and the balance of power in Washington as the ideological fight over the size and role of government grinds on.

Boehner faces an immediate test today, needing to bring along enough Republicans to push the deal through the House. The Republican presidential field will have to decide how to navigate between the compromise reached by congressional leaders and the passions of the tea party movement.

Obama’s challenge is to reassert himself as a leader and use the outcome to position himself on the campaign trail as the voice of reason and moderation in a bitterly polarized capital.

“Is this the deal I would have preferred? No,” Obama said, speaking from the White House. He added, “This process has been messy; it’s taken far too long.”

For Obama, the most imminent blessings are avoiding a default and delaying the next fight over raising the debt limit until after the 2012 election. (House Republicans wanted to have another debate early next year.) He also can present himself as a deficit-cutting president, even though a fair share of the $2.4 trillion in cuts is unpopular with his core followers.

But the fine print of the agreement makes clear that Republicans received more of what they demanded than did Obama, who acquiesced in his initial call for a balanced mix of spending cuts and new revenues, despite repeatedly trying to seize the bully pulpit to build support for his argument.

For many liberals, this concession — and the president’s unwillingness to make a more full-throated case for greater action to address joblessness and protect other Democratic priorities — could undermine legislative support for the deal and increase the challenge of motivating voters in 2012.

The White House and Senate may be controlled by Democrats, but the debate unfolded squarely on Republican turf. It is yet another sign of how the country’s politics have changed since Obama’s term began, and of the new climate facing Republicans who are jockeying for the chance to challenge the president next year.

As Boehner has witnessed throughout the budget debate, the newly empowered voices in the Republican Party can be difficult to control. He faces the near-certainty of large numbers of defections from his ranks today as he tries to win support for the compromise with the Senate, support he needs to avoid sinking the deal and owning the political fallout.

“This isn’t the greatest deal in the world,” Boehner told House Republicans in a conference call on Sunday evening. He added, “It shows how much we’ve changed the terms of the debate in this town.” 

While the White House has taken a measure of comfort from the displays of dysfunction in the Republican ranks, there has not been a shortage of discord among Democrats. The liberal group MoveOn.org said Sunday that it was “extremely troubling that it now appears that some Democrats are willing to give in to Republican demands to make this already disastrous plan worse for working families.”

The outcome, perhaps, was better for Obama as a presidential candidate than as a president. His ability to face down House Republicans over the next 18 months is in question, but when he faces voters next year, his advisers believe that the debt-ceiling fight will have created a clear contrast between his priorities and that of a Republican party that he and his allies will no doubt portray as extreme.

The president can no longer make the argument that he has changed the way Washington works — Obama’s Washington, in fact, has looked even worse than previous eras — but his advisers hope he will still come across as the more reasonable alternative, and the only way to put a check on a conservative movement seeking a wholesale redefinition of the proper role of government.

The president offered a preview of that message in his brief remarks Sunday evening, declaring that it was time to “end the crisis that Washington imposed on the rest of America.”

But the country has also watched as Obama has struggled to make his case.

A daily series of meetings with legislative leaders in which the president smiled as he trumpeted a “grand bargain” that he hoped to reach with Boehner gave way to the president delivering a scathing denouncement of Republicans. In recent days, advisers made the decision to keep Obama out of public view, reaching out to legislators by telephone instead.

The drawn-out debt debate may well be recorded as one of the lower points of his presidency. From the outset, Obama had the most to lose if the negotiations failed and the least to gain if they succeeded. But he confined his arguments largely to televised appearances inside the White House — from the Cabinet Room to the East Room to the press briefing room — rarely venturing outside Washington to take the debate directly to the public.

By late last week, when the irritation was alive in his voice, Obama was urging his supporters to call or send messages via Twitter. Democrats complained that his voice was too quiet during the debate, but in the president’s brief statement from the White House on Sunday evening, he dismissed those suggestions.

“I want to thank the American people,” Obama said. “It’s been your voices, your letters, your e-mails and your tweets that have compelled Washington to act in the final days.”