On August 5th 2011, Standard and Poors announced that it was downgrading US long term sovereign debt from AAA to AA+, the first such downgrade in US history.

Here are five things we should know about the downgrade, four important and one trivia.

1. S&P downgraded US debt not only because of the deteriorating fiscal outlook, but also because of concerns about America's ability to govern itself. It said "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long term fiscal sustainability."

2. Moody's and Fitch recently reaffirmed their AAA ratings on US sovereign debt. Moody's reaffirmed its Aaa rating, but assigned a negative outlook given the risk that the US might flinch from further fiscal tightening, borrowing costs might rise, and the economy might weaken. Fitch similarly reiterated its AAA rating on Tuesday, but noted that it would have a fuller reassessment by the end of August. Fitch also emphasized the need for further fiscal adjustments. One issue is how the impact of a downgrade would increase if it spreads from just one rating agency to two or three.

3. In the past thirty years, five nations, Australia, Canada, Denmark, Finland, and Sweden, have regained a AAA rating after losing it. See, for example, this nice chart from BusinessWeek: America still has much to learn from other nations that fixed their economics and budgets after financial crises. Sweden, for example, did a remarkable job addressing the fiscal challenges that followed its financial crisis in the early 1990s.

4. This downgrade may set off a cascade of further downgrades for other US debt. The federal government provides an implicit or explicit backstop for many other debt securities. For example, the federal government stands behind trillions of dollars of debt and guarantees issued by Fannie Mae and Freddie Mac, GNMA securities, and securities backed by guaranteed students loans. It implicitly stands behind systemically important financial institutions. And it provides substantial support to state and local governments. S&P did not specifically address these other credits in Friday’s report, but did say that "We will issue separate releases concerning affected ratings in the funds, government related entities, financial institutions, insurance, public finance, and structured finance sectors."

S&P did reaffirm its highest, A-1+ rating on US short term debt, which should limit impacts on money market funds and other short term lending markets.

5. S&P was not the first rating agency to downgrade US sovereign debt. In the category of trivia, China's Dagong credit rating agency downgraded US credit to A with a negative outlook earlier this week. Dagong had initiated US coverage with a AA rating about a year ago, which was lowered to A+ last November. Dagong apparently views the United States as a greater risk than China. Despite all of America's problems, that seems a stretch.

(Article written by Donald Marron)