Is U.S. government debt about to be lowered to junk bond status?

While that risk is not imminent, the Obama administration is now officially on notice that downgrade of the U.S. sovereign credit rating is not out of the question.

On Tuesday, credit-rating agency Moody’s Investor Services warned the U.S. and Britain may lose their AAA sovereign credit ratings due to deteriorating finances, according to a report by Dow Jones Market Watch.

Moody’s has decided that for now the U.S. and Britain will retain AAA ratings, however, both nations are being moved to the “resilient” category.

In Moody’s credit-rating scheme, the “resilient” category an intermediary position between a “resistant” top rating, where countries such as Canada, Germany, France, Switzerland and New Zealand are seen as economically solid, and a bottom rating of “vulnerable,” where yet AAA-rated countries have stretched their debt financing to the point of “no return.”

Downgrading sovereign nation debt ratings is a dramatic move with costly consequences.

A U.S. credit-rating downgrade would increase the cost of borrowing by raising the interest rates the U.S. Treasury would have to pay to induce institutional and foreign government investors to buy the amount of Treasury debt needed to be sold to continue financing U.S. trillion-dollar federal budget deficits.

The problem in both the U.S. and Britain is large and growing central government budget deficits.

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