Last night S&P downgraded United States debt from AAA to AA+. It’s the first time the US has been downgraded, and there’s been a lot of discussion about whether S&P is a credible agency making credible judgments. They gave Lehman Brothers a AAA rating a month before their collapse in 2008, there have been persistent questions about their role in giving high ratings to toxic subprime mortgage debt, and Italian prosecutors raided Moody’s and S&P offices in Milan earlier this week. Paul Krugman denounced the downgrade in harsh terms:

In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

Embarrassingly, S&P was found by the White House to have been $2 trillion off in its financial calculations. But instead of not going ahead with the downgrade, S&P did so anyway, citing political factors, primarily Republican unwillingness to let the Bush tax cuts expire.

The downgrade may not have much actual effect on US finances. Last week’s market downturn saw a flight to safety, including US treasuries. US credit default swaps hadn’t been affected, and overall the markets seem to believe that US debt is perfectly fine. Despite the hype, it’s unlikely that the downgrade will have a hugely negative impact on federal finances, and borrowing costs will likely remain low.

That’s not to say there’s no problem here. The downgrade doesn’t change the basic facts on the ground in Washington DC – that the House of Representatives is controlled by a group of insane radicals who are absolutely determined to gut federal spending, and Senate Democrats along with the White House are either unwilling or unable to stop them. In fact, the stock market’s decline last week was largely due to concerns with the impact of the austerity plans adopted by Congress in order to raise the debt ceiling, along with concerns at austerity-induced problems in the eurozone.

Those problems aren’t new, and the Republican House has had its eye on HSR funding ever since it came to power in January. The downgrade doesn’t change any of that. It might put additional pressure on Congress to cut more spending – even though S&P said the problem was an unwillingness to raise taxes – but the Republicans will use any excuse they can find to press for HSR funding cuts.

What about the downgrade’s impact on California? Last week there was speculation that HSR was first on the chopping block in the event of further austerity in California:

Even though construction of California’s 800-mile high speed rail project is scheduled to begin next year, a lot of questions remain. Moody’s senior economist Eduardo Martinez said that he thinks the project is a prime target for a funding cut.

”High speed rail is not universally accepted in this country, or in California in its current form. There are a lot of concerns with cost overruns,” said Martinez. “And in the Bay Area alone there are a lot of concerns over pathways – whether it’s going to go through the Peninsula or the East Bay. So that makes it a prime target.”

This is nonsense. Nothing is universally accepted in this country. And we know that majorities of Californians support HSR, as does the state legislature. HSR funding survived brutal rounds of austerity in Sacramento in the last four years, so it’s hard to imagine why things would be any different now.

Martinez’ argument is based on the conventional wisdom that in a recession, you cut rather than spend and invest. That may hold sway right now in the House of Representatives, but it hasn’t exactly held in California, as HSR funding’s popularity and survival shows. Future federal cuts, which are coming regardless of a downgrade unless Obama and Senate Dems decide to stand up to House Republicans, could force further austerity in California, but because political leaders in Sacramento understand the need to spend money on infrastructure to create jobs, HSR doesn’t seem a very likely target at all.

What about the impact on the state’s ability to sell the Prop 1A bonds? Treasurer Bill Lockyer was busy concern trolling about the project in June, complaining about the business plan and ridership projections. But he acknowledged that because Prop 1A are general obligation bonds, selling them would be a breeze:

Lockyer said he initially presumed that “we would go to market with a high-speed rail bond;” that is, bonds tied to the bullet train project.

“I was worried that if I had to sell a pure high-speed rail bond, that the uncertainties, the (issues of) revenue stream and passenger volume and fare box revenues were so unsettled that no investor would want to take that risk,” he said.

Actually, the rail bonds are to be “just a vanilla general obligation bond, backed by the state’s credit,” Lockyer said. Thus, they pose no special marketing problems.

He speaks from experience. California has a low bond rating, with several downgrades in recent years. But Lockyer has had no trouble selling debt on the market. Demand for California bonds remains strong.

That’s because the state constitution mandates that bondholders, along with schools, have first claim on tax revenues. Default is essentially not an option.

Overall, then, it’s hard to see the US credit downgrade having any impact on the HSR project. It doesn’t change the fact that we have a serious problem in Congress, it won’t erode public or political support for the project in California, and it won’t make it difficult to sell Prop 1A bonds to start construction in the Central Valley next year. Rating agencies are of questionable value anyway, and the primary loser of the downgrade may be S&P’s reputation.