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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.

Britain's debt-to-gross domestic product, or GDP, ratio is expected to top 12 percent this year, while the U.S. budget gap is expected to be nearly 10 percent.

In both countries, the debt-to-GDP ration is increasing.

Britain's debt-to-GDP ratio is expected to rise to 69 percent at the end of this year, from 47 percent in 2007.

The debt-to-GDP ration for the U.S. is expected to rise to 53.4 percent this year, from 40.2 percent in 2008.

Nor does the federal debt crisis in the U.S. show any sign of abating.

The Congressional Budget Office reported last week that the U.S. federal government is running a larger deficit in the first two months of Fiscal Year 2010, compared with the same period last year.

In October and November, the federal government spent $292 billion more than it took in, according to the CBO, raising the prospect the 2010 federal budget deficit will be even larger than the 2009 record federal budget deficit of $1.4 trillion.

In his speech to the Brookings Institute on Tuesday, President Obama said the nation must continue "to spend our way out of this recession."

Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee, said Wednesday that Congress must increase the U.S. debt limit by around $1.5 trillion to ensure the federal government's borrowing needs are met through 2010.

The current U.S. borrowing limit stands at $12.1 trillion, and the U.S. Treasury expects to reach that limit soon.

On Tuesday, Moody's also downgraded the general obligation bond rating of the state of Illinois, giving Illinois the second lowest U.S. state rating from Moody's, with California having the lowest at BAA 1, according to Reuters.

WND recently reported 10 states face imminent bankruptcy: California, Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin.

WND has also reported the negative net worth of the U.S. government, according to GAAP accounting reports compiled by the U.S. Treasury, was $65.5 trillion, exceeding world GDP.

Separately, Moody's placed the ratings of government-related issuers in the United Arab Emirates, including from Abu Dhabi, on review for possible downgrade after conglomerate Dubai World defaulted on billions of dollars of scheduled debt repayment.

Moody's also warned Greece that a downgrade was imminent. On Tuesday, Fitch, another credit-rating agency, cut ratings on Greek debt to BBB, the lowest level in the eurozone.

Greece's socialist government that took over in October is experiencing a credibility gap convincing Moody's that the government can manage the country's large and growing debt by implementing the required revenue-raising measures and cutting spending enough to bring the country's debt-to-GDP ratio within EU requirements.

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