The first [reasonable reaction to S&P's announcement] is sheer incredulity. S&P is famous for having issued what Senator Carl Levin (chair of the Senate investigations subcommittee) recently called "inflated credit ratings" prompted by "rampant conflicts of interest" in the US financial industry. Senator Levin named this company a "key cause" of the economic crisis. That is polite-speak for having published misleading information about credit risks and/or having shown monumentally poor judgment in assessing such risks. So, we now should take seriously what this utterly compromised company says? What?!
This nicely summarizes my own first thought when I heard that S&P was issuing a warning on U.S. debt. Please.