Bond rating agency Moody's Investor Service put U.S. government debt on review for possible downgrade.

In a statement released Wednesday after the close of markets, Moody's said it has placed the Aaa bond rating under review given "the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations."

On June 2, Moody's had announced that a rating review would be likely in mid-July unless there was meaningful progress in negotiations to raise the debt limit.

The warning also applied to the ratings of financial institutions linked with the government including mortgage lenders Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.

A downgrade would lead to higher interest rates in the U.S. and in Canada, as a major American economic partner.

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," it said.

"However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range."

Republican warns against default

The move Wednesday came as a senior Republican said that a U.S. government default on its debt is something the nation cannot afford.

"Nobody wants to go there, because nobody knows what's going to happen. It's a crapshoot," House Speaker John Boehner said as the White House and legislators scrambled to negotiate a deal to allow passage of a vote to raise the government's borrowing limit.

The Treasury Department has said the government will be in default if the debt ceiling isn't raised above its current $14.29 trillion US by Aug. 2.

Economists fear a failure by the government to pay interest due on its debt could rock the economy.

Republican House Speaker John Boehner said Wednesday that negotiating with the White House has been like 'dealing with Jell-O.' (Chip Somodevilla/Getty Images )

Republicans are demanding more than $2 trillion US in budget cuts as the price for an increase in the government's ability to continue to borrow more than 40 cents of every dollar it spends.

In comments to reporters, Boehner said he has not been able to get commitments from President Barack Obama or his White House team about cutting big spending programs.

Boehner said that "dealing with them the last couple months has been like dealing with Jell-O."

Both Republicans and Obama see the vote on raising the debt ceiling as a way to seize an opportunity to cut future deficits — a move that would seem to be to the political benefit of both sides.