Bond investors have been put on notice by rating agency Standard & Poor's that it is not just the U.S. sovereign debt rating that is in jeopardy because of the ongoing wrangling in Washington over raising -- or not raising -- the federal debt ceiling and, especially, whether or how lawmakers cut the government’s massive and ever-growing deficit.

The agency says that the negative CreditWatch it and other agencies have placed on U.S. debt, and the potential of a downgrade later this year, also threaten the credit ratings of a multitude of other debt instruments and agencies, including some that are not even part of the federal government.

S&P reports that its Ratings Services unit is in the process of placing a number of entities that have “direct links to, or reliance on, the federal government” on its CreditWatch with “negative implications.”

Among the entities that are facing a downgrade threat along with the U.S. government are certain currently AAA-rated insurers, clearinghouses and central securities depositories. Others at risk include certain select AAA-rated government-related entities that can also issue debt and debt issued by private financial institutions under the Temporary Liquidity Guarantee Program (TLGP), which was part of the rescue program developed to tackle the 2008 financial crisis.

Also having their ratings threatened, S&P warned, are certain fixed-income funds, ETFs and hedge funds, as well as local government investment pools and unit investment trusts.

Unaffected, the agency says, would be U.S.-based AAA-rated state governments and non-financial corporate issuers.

Among the reasons for the far-reaching ripple effect of any U.S. sovereign downgrade or downgrade threat on ratings of even some non-governmental issuers such as insurance companies, S&P said, is economic volatility resulting from a downgrade or federal default, potential devaluation of the U.S. dollar, and “investment portfolio deterioration.”

S&P said its decision to put U.S. sovereign debt on a CreditWatch has also led it to place negative CreditWatches on 125 FDIC-insured AAA-rated debt obligations issued by 30 financial institutions under TLGP.

Also being placed on CreditWatch because of the U.S. sovereign CreditWatch are 73 of 206 S&P-rated funds managed in the U.S., Europe and Bermuda  because of their “significant exposure” to U.S. Treasuries and U.S. government agency securities, as well as 604 structured finance transactions with a total original issuance value of $374 billion.”

Nicola Swann, a sovereign credit analyst with S&P based in Toronto, in an interview with On Wall Street, said S&P’s decision to issue these CreditWatches is based upon a view that it is “unlikely” Congress and the White House will “come out of the debt ceiling issue with any long-range fiscal consolidation plan.” 

“All things being equal, we’d need to see $4 trillion in cuts over a 10-year period as a minimum” in order to avoid a downgrade of the U.S. sovereign debt rating, he said. “$1-2 trillion is not enough.”