Thursday, August 11, 2011

Was the S&P downgrade based on an error?

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C, had this to say about the S&P downgrade of the US credit rating, writing in MRZine, a Monthly Review online 'zine:

The decision by Standard & Poor's to downgrade U.S. government debt reflects its own failings as a credit rating agency. It says nothing about the creditworthiness of the U.S. government.

The Treasury Department revealed that S&P's decision was initially based on a $2 trillion error in accounting. However, even after this enormous error was corrected, S&P went ahead with the downgrade. This suggests that S&P had made the decision to downgrade independent of the evidence.

It would be difficult to find any basis for questioning whether the United States will be able to repay its debt. With investors willing to hold trillions of dollars in long-term U.S. debt at interest rates well below 3.0 percent, the financial markets certainly do not seem to share S&P's concern. It is also noteworthy that interest rates fell in the wake of S&P's decision, providing further evidence that the markets do not take S&P's assessment seriously.

read the entire article here...

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