The United States and Britain are more likely than Germany and France to witness an embarrassing downgrade of their top debt rating, agency Moody’s Investors Service said on Monday.

In a quarterly report assessing the prospects of the triple A—rated countries, including Spain and the “less fiscally challenged” Denmark, Finland, Norway and Sweden, Moody’s warned that the economic recovery remained fragile in many advanced economies.

“This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable,” says Arnaud Mares, senior vice-president in Moody’s sovereign risk group and the main author of the report.

Governments and central banks are looking at when and how to unwind their massive stimulus measures, which include historically—low interest rates, liquidity provisions, industry incentives and increased spending. Although some experts warn that exiting these policies too early risks creating a new economic downturn, they are also straining government finances.

For now though, Moody’s said the triple A governments don’t face an immediate threat to their top ratings as the servicing of the debt remains manageable - the top credit rating reduces the interest payments countries have to pay on their debt when going to the bond markets to raise capital.

However, debt affordability is “most stretched” in Britain and the U.S., Moody’s said.

In the light of the muted recovery from recession in many countries, Moody’s said government action on spending and taxes is the main way of “repairing the damage” that the global crisis inflicted on government finances.

Moody’s said triple A governments also face a “delicate balancing act” with respect to the timing of these adjustment and that tightening fiscal policy before the recovery has become self—sustainable could risk undermining the recovery, thereby damaging governments’ power to tax. However, it warned that postponing fiscal consolidation much longer is “no less risky as it would test the patience of the market” and could force central banks to take the initiative.

“At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility,” said Pierre Cailleteau, managing director of Moody’s sovereign risk group.

The debate about when to start cutting spending is likely to be at the heart of the general election campaign in Britain, which is expected to formally kick off in the next few weeks - most commentators think that Prime Minister Gordon Brown, will call an election for May 6 early next month.

While Brown’s governing Labour Party is arguing that spending cuts should not be sanctioned until the recovery from recession is on a surer footing, the main opposition Conservative Party says it’s imperative that the government gets a grip on debt soon to shore up market support.

Economists warn that Britain is on course to borrow the equivalent of 12.8 percent of gross domestic product in 2009/10 - exceeding the 12.7 percent forecast in crisis—hit Greece and far above the average 6 percent for Europe.

In the U.S., the budget deficit this year is projected to be just under 10 percent of the economy, meaning that the Treasury has to sell more and more bills to fund the shortfall.

One country that got a thumbs—up from Moody’s was Spain.

It said that it was the first triple A government to rise to the challenge when faced with meaningful market pressure to announce such measures, although its adjustment process will “undoubtedly be drawn out and painful.”

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