* 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 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
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,"
As of Tuesday, the federal debt was just $209 billion below
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
(Editing by Andrew Hay)