* Obama says issue could ‘unravel’ financial system
* White House, Republicans locked in debate (Adds quotes from Obama, background on debt)
By Jeff Mason
WASHINGTON, May 15 (Reuters) - President Barack Obama warned Congress that failing to raise the U.S. debt limit could lead to a worse financial crisis and economic recession than 2008-09 if investors began doubting U.S. credit-worthiness.
In remarks recorded last week and broadcast by CBS News on Sunday, Obama repeated his stance that Republicans should not link the debt ceiling decision to spending cuts as part of deficit-reducing measures.
“If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system,” Obama told a CBS News town-hall meeting.
“We could have a worse recession than we already had, a worse financial crisis than we already had.”
The White House and congressional Republicans are locked in a debate over the deficit and the debt ceiling.
The Treasury Department is expected to hit its $14.3 trillion borrowing limit on Monday, making it unable to access bond markets again.
Republican leaders, who have said they agree the limit must be raised, say they will not approve a further increase in borrowing authority without steps to keep debt under control.
A deal may not emerge for several months.
The Treasury Department says it can stave off default until Aug. 2 by drawing on other sources of money to pay its bills.
Obama said he was committed to deficit reduction but discouraged a link between that and the debt limit.
“Let’s not have the kind of linkage where we’re even talking about not raising the debt ceiling. That’s going to get done,” he said. “But let’s get serious about deficit reduction.”
A report from the think tank Third Way to be released on Monday supports Obama’s warnings. It says the United States could plunge back into recession if inaction in Washington forced a debt default, with some 640,000 U.S. jobs vanishing, stocks falling and lending activity tightening.
Vice President Joe Biden is leading talks between the White House and lawmakers over how to reduce massive U.S. budget deficits and raise the credit limit. He told reporters on Thursday that progress was being made but it was too early to be optimistic about a deal. (Additional reporting by Andy Sullivan; Editing by Peter Cooney)