Standard and Poor’s downgrade of US Treasury obligations should not have come as a surprise and the move’s direct implications for global financial markets should be limited. The agency had earlier served notice by putting US debt on negative watch; the downgrade gave investors no information about Washington’s broken fiscal machinery they did not already have; and the other agencies have so far maintained their ratings. The indirect implications of the downgrade, though, may prove more troublesome.

The Federal Reserve quickly announced that it will continue to accept Treasuries as collateral and that banks will suffer no capital-adequacy penalty as a result of the downgrade. Similar reassurances have begun to emerge from finance ministries of the Group of Seven and Group of 20 countries, whose officials were deep in conference calls this weekend.

However, S&P’s decision will be followed as soon as today by ratings announcements for US government-related entities such as Fannie Mae and Freddie Mac. Further downgrades therefore look likely. The ratings of other borrowers, some corporate as well as public, may suffer knock-on downgrades as Friday’s decision cascades across financial assets.