S&P's historic downgrade of the U.S. raises questions over its "credibility and integrity," wrote John Bellows, Acting Assistant Secretary for Economic Policy, on the Treasury's blog.

Bellows' argument is that S&P first based its justification for the downgrade primarily on the economic grounds that the debt ceiling deal (Budget Control Act of 2011) failed to reduce debt to a sustainable level relative to the GDP.

However, S&P's debt-to-GDP projections was based on a mathematical error that threw off their figures by $2 trillion, or eight percentage points of the projected GDP of 2021.

Once S&P realized the mistake, Bellows said it changed its economic justification to political ones.

The Mistake

The Congressional Budget Office calculated that the debt ceiling deal would reduce the budget deficit by $2.1 trillion over 10 years in a world where discretionary funding grew in line with inflation.

S&P, however, incorrectly assumed that the CBO's $2.1 trillion savings figure applied to a world where discretionary funding levels grew in line with nominal GDP.

In S&P's world, the debt ceiling plan would actually reduce the budget deficit by $4 trillion over the next 10 years.

The Downgrade

S&P's document that explained its downgrade stated that it "reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what...would be necessary to stabilize the government's medium-term debt dynamics."

Only in subsequent bullets points did S&P list political considerations. S&P primary argument, therefore, remains economic.

However, Bellows is right in that S&P does consider a difference of $2 trillion to be significant, but just not when it comes to their own miscalculations.

S&P sovereign-rating chief John Chambers, for example, said a $4 trillion deficit reduction would not "do the trick in terms of stabilizing U.S. government debt-to GDP ratios." However, it "takes you pretty far along" and signals "the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP."

Presumably, this "seriousness" would have prevented a downgrade. 

S&P Criticism

In the aftermath of the global financial debt crisis, S&P and other major ratings agencies were heavily criticized for giving AAA ratings for collateralized debt obligations (CDOs) that went on to suffer heavy losses.

Now, it is being criticized by the U.S. government for cutting the U.S. ratings even though "millions of investors around the globe...assess [the U.S.] creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations."

Lodged in both criticisms, however, is the sloppiness of S&P's analysis.