For any government, a credit rating downgrade is unwelcome. For Germany, the eurozone's biggest economy, it would be close to a national humiliation.

But according to some experts, the prospect that the federal German government could lose its top-notch, triple-A rating on world credit markets is no longer unthinkable.

The main international rating agencies have no plans to review Germany's standing at the moment. But one, Standard & Poor's, says this may change if the government seeks to combat Germany's deteriorating public finances by issuing debt jointly with the country's 16 Lander, or federal states.

Moritz Kraemer, a director at S&P, says a triple-A credit rating "is not a birthright. We've downgraded Japan."

The issue has come into focus since European Union governments let Germany off the hook last month by refusing to endorse a warning the European Commission wanted to give Germany for running too high a budget deficit.

Germany's deficit last year was 2.7 per cent of gross domestic product, close to the limit of 3 per cent set in the EU's stability and growth pact. It made Germany the only country that for two successive years overshot its deficit target agreed with the EU.

However, the deficit was high not because of fiscal indiscipline at the federal level, but because the states, and to a lesser extent municipal governments, increased spending while suffering a fall in revenues. The states' deficit alone rose to 1.3 per cent of GDP last year from 0.5 per cent in 2000.

To improve their finances, some states would like to issue debt jointly with the federal government, a step that would enable them to take advantage of the government's top credit rating and reduce their borrowing costs.

Only three Lander have triple-A ratings - the rich western states of Baden-Wurttemberg, Bavaria and Hesse. The lowest rating, AA minus, belongs to the eastern state of Saxony-Anhalt.

The federal government publicly rules out joint debt issuance, partly on constitutional grounds and partly because it recognises the risk that its credit rating could be diluted if it combined forces with lower-ranked states.

But Ernst Welteke, the Bundesbank president, said last month that pooling bond issues was "a sensible idea in principle".

The federal government's dilemma is that Germany's constitution does not allow it to dictate states' budgets. So while the government is not required to guarantee states' debts, it lacks power to insist on tighter fiscal discipline at state level.

Joint debt issuance could therefore be a useful carrot to offer the states, if the government secured from them a promise of fiscal restraint in a so-called "national stability pact". Precisely such a pact is now under consideration by the government.

Analysts at Goldman Sachs say it need not trigger the loss of Germany's triple-A rating, because greater central influence over the states' finances could in the end reduce Germany's overall public borrowing.

But S&P says it would need to study the terms of such a deal, "including the procedure applied if a particular state were not able or willing to abide by its commitment vis-a`-vis the federal government".

Alexander Kockerbeck, of Moody's Investor Services, says that, regardless of the pros and cons of joint debt issuance, Germany's public finances will remain under scrutiny.