WASHINGTON (MarketWatch) — The United States late Friday lost its triple-A debt rating from Standard & Poor’s for the first time in history, with the credit-rating agency saying the political system of the world’s top economy has become less stable and that budget cutting announced earlier this week didn’t go far enough.

S&P lowered its rating on the U.S. by a notch to AA+ and, to compound the embarrassment, said the outlook is negative as well, as it threatened another reduction in two years. The rating agency said the deal reached by lawmakers to cut the federal deficit by an estimated $2.1 trillion over a decade didn’t go far enough, and “America’s governance and policymaking [is] becoming less stable, less effective, and less predictable than what we previously believed.” Read text of downgrade.

S&P, a unit of McGraw-Hill MHP, , had said in July that $4 trillion in cuts over a decade would be required if the U.S. were to keep its triple-A rating. The U.S. has over $14 trillion in debt, and, even after the deal reached this week, is anticipated to add another $7 trillion over the next decade.Read more on debt-ceiling deal.

By S&P’s analysis, the U.S. debt-to-GDP ratio will hit 85% by 2021.

The move caps a wild day for markets and S&P itself. Multiple press reports indicated S&P had delayed downgrading U.S. debt after the White House — which had received a draft — spotted errors estimated to be worth $2 trillion. Full story: S&P said to back away from U.S. downgrade.

A Treasury spokesman said those errors made the decision “flawed.”

S&P downgrade — and fallout

The market impact of the S&P move is uncertain, but the wild 416-point swing in the Dow Jones Industrial Average DJIA, +1.19% on Friday was in part influenced by rumors of such a move. The political ramifications also were explosive, with both sides quickly taking to cable news stations to blame each other for the U.S. downgrade.

Fellow rating agencies Moody’s MCO, +1.44% and Fitch Ratings have not been as critical as S&P about U.S. finances, as both have affirmed their triple-A ratings. (Moody’s has warned that it may downgrade the U.S. in the future.)

Investors that are required by their mandates to invest only in triple-A-rated debt may still be able to own Treasury bonds if only one firm lowers its U.S. debt rating. It’s also unclear whether Treasurys pledged as collateral in various derivatives trades would be impacted.

The Federal Reserve and the Federal Deposit Insurance Corp. quickly issued a statement saying banks would not have to increase bank capital that was backed by Treasury or other federal-government-backed obligations. The Fed also said discount-window borrowing would not be impacted.

In any case, investors have flocked to Treasurys this week, with government-bond prices seeing their biggest gains in two years, which indicates investors have brushed off concerns that they won’t be paid back.

China effectively has no other option but to buy U.S. Treasury obligations to keep the value of the yuan artificially low.

The rating agencies have been heavily criticized for their role in the credit crisis for not downgrading mortgage-backed securities, but there are few alternatives to their role.

Early Saturday Tokyo time, the Wall Street Journal reported that an unnamed senior Japanese official had said the S&P downgrade wouldn’t affect Japan’s investment policy.