Moody’s Investors Service says the challenges facing the U.S. government’s finances could have consequences for U.S. financial institutions that are vulnerable to U.S. sovereign risk.

Moody’s, New York, today “placed the U.S. government’s debt rating on review for possible downgrade,” the company says. “If a U.S. government debt-ceiling-related default were to occur, Moody’s would likely downgrade the Aaa U.S. government rating somewhere in the Aa range. A return to a Aaa rating would be unlikely in the near term.”

President Obama and members of Congress are in negotiations over efforts to raise a statutory limit on debt that could affect the ability of the government to make payments on its obligations. Moody’s is putting the U.S. government’s bond rating on review because of concerns about the ability the ability that the negotiations will fail.

A rating downgrade move could affect debt securities directly linked to the U.S. government, such as debt issued by the Temporary Liquidity Guarantee Program, and to agencies closely tied to the government, such as the federal mortgage guarantee agencies, the company says.

A downgrade of the U.S. debt rating all could lead to big cuts in the ratings of 8 banks that have high ratings partly because Moody’s considers them to be “too big to fail.”

In some cases, Moody’s says, it gives systemically important banks higher ratings than it gives their governments, because “governments have an array of tools to assist banks that go beyond the government’s ability to service its debt.”

The 4 U.S. insurers that have Aaa ratings from Moody’s — Teachers Insurance and Annuity Association of America, New York; United Services Automobile Association, San Antonio; New York Life Insurance Company, New York; and Northwestern Mutual Life Insurance Company, Milwaukee — have those ratings based on Moody’s assessments of their own operations, Moody’s says.

“However, these assessments are influenced by external conditions which can exert a meaningful influence on insurers’ intrinsic financial strength,” Moody’s says. “Over the next week, we will assess each of the four insurer’s unique business and investment concentrations relative to the domestic market as well as the short and/or long-term negative drivers of the domestic market. We anticipate that in the case of a 1-notch downgrade of the U.S. government, it is unlikely that the [insurer financial strength ratings] of these 4 groups will be affected. A multi-notch rating move could affect them, however, requiring one or more of these insurers being placed on review for possible downgrade.”

In the long run, weakness in a country’s “economic, social, judicial, institutional and general business conditions can degrade an insurer’s ability to operate,” Moody’s says. “Furthermore, weakness in a country’s own balance sheet and the ramifications of any austerity measures taken to improve one’s own balance sheet on the broader economy can also negatively impact insurers.”

Insurers also may have substantial exposure to their governments’ bonds, and other obligations linked to their governments’ bonds, Moody’s says.

The rating agencies have faced harsh criticism in recent years because of concerns that they did too little to detect the problems with mortgage-backed securities that contributed to the severity of the credit market crisis that first came to light in 2007. Congress included provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that are supposed to eliminate federal agency reliance on credit ratings, but ratings still affect the rates borrowers pay for loans.

Corporate notes with a duration of 5 years from corporate issuers with AAA ratings were yielding an average rate of 1.65% Wednesday, according to an index produced by ValuBond, a service provided by a unit of Knight Execution and Clearing Services L.L.C., Jersey City, N.J.

The average yield was 2.43% for comparable notes issued by companies with AA ratings and 2.76% for comparable notes issued by companies with A ratings.

In the municipable bond market, the average yield for a 5-year note was 1.32% for AAA issuers, 1.55% for AA issuers and 1.96% for A issuers.

The average yield for a 5-year U.S. Treasury was 1.43%.

Other U.S. Government solvency coverage from National Underwriter Life & Health: