US administration says default could be 'catastrophic'

WASHINGTON (REUTERS) - The Obama administration said the US economy could fall into its deepest crisis since the Great Depression if Congress does not raise a cap on government borrowing soon and warned it would be impossible to prioritise debt payments over other obligations.

In a report released on Thursday, the Treasury Department said a US debt default could force up borrowing costs, weaken investment and curb growth. This could inflict damage on the economy that could last for longer than a generation.

"A default would be unprecedented and has the potential to be catastrophic," Treasury said.

"The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

A standoff over financing, prompted by Republicans'determination to halt President Barack Obama's healthcare reforms, has already shut down sections of the government.

But analysts warn the economic mayhem would be even greater if the shutdown merges with a more complex fight looming later this month over raising the federal debt limit, which could cause the United States to miss debt payments.

A senior Treasury official told journalists that favouring bills to creditors over others would be unworkable and the administration was completely opposed to this approach.

Some Republicans on Capitol Hill support a plan for the Treasury to prioritise debt payments, as many economists believe a missed payment on government debt could trigger a devastating rout in global markets.

Indeed, analysts have generally believed the Treasury would at least try to prioritise debt payments over other spending on other programmes.

The Treasury expects to exhaust its ability to borrow under the nation's US$16.7 trillion debt ceiling by October 17, at which point the government would be down to its last US$30 billion, in addition to new incoming revenues.

The Congressional Budget Office expects the nation could start defaulting on obligations between October 22 and the end of the month. Large debt payments loom on October 24 and October 31.

US Treasury debt, long deemed risk-free, is the foundation of the global financial system. Assets around the world use US Treasuries as a benchmark for their value.