Standard & Poor's, the credit rating agency, is fighting to shore up its reputation after an unprecedented assault from the White House in the wake of its historic downgrade of US government debt.
The decision to strip the world's economic superpower of its top-notch AAA credit rating after 70 years had financial market players holding their breath ahead of trading today, as if the spiralling crisis in the eurozone and plunging global stock markets had not jangled nerves enough in the past week.
S&P appeared to have been caught off guard by the virulence of the Obama administration's response to the downgrade. Officials attacked the credibility of the agency, claiming it had admitted a $2 trillion mathematical "error" in an early version of its decision, but then downgraded the country anyway.
"The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in the press release once the error was pointed out was breathtaking," said Gene Sperling, the head of the administration's National Economic Council. "It smacked of an institution starting with a conclusion and shaping any arguments to fit it."
The White House strategy appeared to be to try make S&P a public laughing stock, a tactic taken up by supportive commentators who pointed out the rating agency's disastrous role in the credit crisis and the erroneous AAA ratings it put on billions of dollars of toxic mortgage derivatives. Partly the aim is political, to insulate President Barack Obama from any public anger over the loss of the country's pristine credit rating, but it is also aimed at pointing out the subjective nature of credit ratings to any investors who might be considering selling US Treasuries on the basis of S&P's move.
For S&P and its parent company, McGraw-Hill, the risk is that the political furore will accelerate moves to undermine the potency of the credit rating agencies. Last year's Wall Street reforms in the US removed scores of rules forcing investors to hold bonds with certain credit ratings, in favour of encouraging investors to do their own research on the creditworthiness of borrowers.
In Europe, where the rating agencies have already borne the brunt of political anger over downgrades to sovereign debt within the eurozone, political leaders are debating ways to create a new rating agency for the continent or to promote competition for the big three existing agencies, which includes Moody's and Fitch as well as S&P.
Moody's and Fitch have kept the US at an AAA grade, albeit with a negative outlook, and the split decision could limit the fallout from S&P's downgrade. The agency condemned the US for using the threat of default as a political football, and said that the $2.4 trillion deficit reduction package agreed last week does not go far enough in tackling the US's long-term debt problem.
In an unprecedented clarification statement, released four hours after the downgrade, S&P accepted it had changed some calculations about the likely trajectory of government spending on which to base its forecasts of the US national debt. The change brought the size of the debt down from $14.7trn to $14.5trn in 2015, and from $22.1trn to $20.1trn in 2021, differences not big enough to affect the rating decision.
While a lower credit rating implies higher interest rates for a borrower over time, traders predicted that demand for US government debt will remain high as long as the crisis in the eurozone persists.
The consensus of investors and analysts was that the financial impact of the downgrade to AA+ could be small, but all admitted it takes global markets into unchartered territory. S&P is likely to downgrade the government-owned mortgage giants Fannie Mae and Freddie Mac today, and possibly some big US life insurers whose businesses are backed by US Treasuries.