Default risk 'catastrophic': Obama


The political crisis gripping Washington could trigger a "catastrophic" US debt default the Treasury has warned as America limped into day three of a government shutdown.

Despite the looming danger to the US and world economies, there was no sign that either President Barack Obama or his Republican foes were ready to give ground.

"There's one way out of this reckless and damaging Republican shutdown. Congress has to pass a budget that funds our government with no partisan strings attached," Obama declared.

"Take a vote, stop this farce and end this shutdown right now."

At midnight on Monday the US federal government ran out of funding after Congress, divided between a Republican-led lower House and Democratic Senate, failed to pass a stop gap budget measure.

Hundreds of thousands of government workers have been sent home, federal agencies have halted all but the most critical operations, parks and monuments have closed and scientific research is on hold.

Now, another threat looms, after Republicans warned that they would not approve an increase in the federal government's debt cap without receiving concessions in the budget debate.

With the government likely to exhaust its cash reserves around October 17, the Treasury said being forced into non-payment of any of its obligations - and in particular its debt - would spark turmoil.

World financial markets would be rocked and the crisis could plunge the United States into deep recession, a Treasury report said.

"In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth," it said.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, 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."

The government is operating just barely below the $US16.7 trillion ($A17.8 trillion) debt ceiling, using what it calls "extraordinary measures" since May to meet a chronic deficit of about $US60 billion a month.

Conservative Republicans want to dismantle or amend Obama's health care law as a condition for approving interim funding for the new fiscal year, which began Tuesday.

However, the president is refusing to tinker with the law, his signature health care reform widely known as "Obamacare" and there is no end to the crisis in sight.

The prospect of feuding lawmakers remaining deadlocked over whether to raise US borrowing authority has international markets and groups like the International Monetary Fund fretting.

"It is 'mission-critical' that this be resolved as soon as possible," IMF Managing Director Christine Lagarde said Thursday in a speech in Washington.