S&P $2 trillion error does not call off US downgrade

The downgrade that came days after Congress finally agreed to raising the debt ceiling has been decided despite a US$2 trillion miscalculation, SP admitted. European markets are expected to respond to the downgrade on Monday.

­The SP rating agency admitted a $2 trillion miscalculation when deciding the downgrade. SP had to rouse several of its European committee in the middle of the night to decide whether to go ahead and downgrade America’s crediting rating. That the downgrade went ahead has not really surprised anyone, as most know that the US had had unsustainable debts for many years.

SP officials notified the Treasury Department early on Friday that it was planning to downgrade the US government’s credit from the top-notch AAA rating it has held for decades.

After just two hours of analysis, Treasury officials discovered that SP had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes, which SP admitted.

The miscalculation and the time the ratings agency took to reconsider the downgrade are among the controversies surrounding the decision to downgrade the US, which has held the agency’s top triple-A rating since 1941.

The day before firms collapsed in the credit crunch they still had AAA ratings on the companies. That damaged the agencies’ reputation, and caused people to lose their life savings.

EU leaders were furious about SP’s double standards. They held long talks with the White House before this decision asking when it would take place and what would happen. That allowed the White House to prepare a smooth response to the media and even question the agency’s judgment. None of that happened last week when the agencies downgraded the European Union countries.

That suggests the agencies are inconsistent and as a result the European Union is creating its own agencies. Although this downgrading is bad for Americans who will have to pay more interest on their loans and have to pay more on their debts, it is bad really for everyone around the world who lent money to America as it raises the risk of not getting that money back.

­The chief economist with Deutsche Bank in Russia, Yaroslav Lisovolik, told RT one of the reasons for the downgrade is the desire of rating agencies to bolster their credibility.

“The rating agencies want to be whistle-blowers, not only react to the crisis situations that have already happened,” he said.

He added it is likely the other big agencies – Moody’s and Fitch – will rethink their ratings.

“It is a possibility because some of the rating agencies have a negative outlook on the current rating for the US, and that implies that within a year or so they might revise the rating for America,” Lisovolik explained.

Lisovolik believes on Monday we will see quite an emphatic international reaction in terms of stocks and the world will start looking for an alternative reserve currency that might replace the dollar.

He added that the downgrade is likely to have negative implications for Russia.

“We will see a downward pressure on the stock market in the short term. And to some degree this will lead to outflows from emerging markets, and Russia is an emerging market. This will have a negative effect on Russia’s assets and most notably on the stock market,” he concluded.

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