UPDATE 1-Geithner warns of market risk on debt limit fight
* Geithner: U.S. can't afford loss of market confidence
* Sen Toomey: delays in vendor payments won't roil markets
* Geithner wants deficits below 3 pct of GDP (Adds quotes from senator, background on debt limit, byline)
By David Lawder
WASHINGTON, Feb 17 (Reuters) - A delay in raising the $14.3 trillion U.S. statutory debt limit could make markets price in risks of a default and undermine economic recovery, Treasury Secretary Timothy Geithner warned lawmakers on Thursday.
The U.S. Congress has in the past routinely raised the limit but Republicans, emboldened by election victories, have threatened not to unless President Barack Obama and Democrats vow to cut public spending.
"I would caution everybody against taking any risk that Congress does not act to increase the limit in the time frame we need," Geithner told the Senate Budget Committee.
"We cannot afford to let the markets lose any confidence that ultimately the Congress will act well in advance of any time that we're going to hit the limit, because that would be catastrophic, and cause grave damage to the expansion underway," he added.
The Treasury has said it will reach the statutory debt limit sometime between April 5 and May 31, although the date could be staved off by about eight weeks if Treasury takes extraordinary measures. [ID:nN02116897]
Once the limit is reached, the Treasury would no longer borrow to meet day-to-day spending needs, including payment of interest on Treasury debt.
Geithner's comments were aimed at a proposal by freshman Republican Senator Pat Toomey that would force the Treasury to pay debt service first if it reached the debt limit, and defer other payments. Many Republican lawmakers want to use the fast-approaching debt limit as leverage to push the Obama administration into deeper spending cuts.
The measure is expected to be added as an amendment to a $61 billion package of spending cuts due for a vote in the House of Representatives by the end of this week. The Obama administration has pushed for a simple increase in the debt limit and wants to deal with deficit reduction in separate legislation.
Geithner called Toomey's plan "unworkable," arguing that financial markets would view a failure to make a payment on any government obligation with grave consequences.
Toomey said it was "inappropriate" for the administration to raise the specter of a default, saying there were no circumstances under which this would be allowed to happen.
"You're telling us that that if we have to delay a payment to the guys who mow the lawn around the (national) Mall that would have the same kind of impact and cause the same kind of financial crisis that would result if we fail to make an interest payment on a Treasury security? That's just not true," Toomey said.
As of Tuesday, the federal debt was just $209 billion below the limit.
Geithner told the committee that passage of President Barack Obama's 2012 budget proposals would provide enough assurance to markets to eliminate any risk of Treasury auctions failing over the next 10 years.
He said the $1.1 trillion deficit reduction plan would produce "a dramatic improvement in investor confidence about the political will in Washington to deal with these problems."
But he said the United States should ideally aim to shrink its annual budget deficits below 3 percent of gross domestic product -- which would require deeper cuts.
"The minimum test is to get deficits comfortably below 3 pct of GDP for sustained period of time," he said.
The administration's budget proposal projects a deficit of 9.2 percent of GDP in fiscal 2011 and 5.6 percent in fiscal 2012. They will average 5.4 percent from fiscal 2011 through 2015. For a table on the White House budget forecasts, see [ID:nN13218405] (Editing by Andrew Hay)