Warnings of economic catastrophe come as Congress prepares to debate debt ceiling

WASHINGTON (Reuters) -President Joe Biden's top aides and local officials nationwide pleaded with U.S. lawmakers on Friday to resolve a government debt showdown that they warned could spark an economic crisis.

Congress plans next week to consider legislation that would avoid a default ahead of an October deadline, when the Treasury Department estimates it will no longer be able to pay all of the country's bills.

The White House warned on Friday that a failure by the U.S. Congress to extend the debt limit could plunge the economy into a recession and lead the country to default on its payment obligations. A coalition of local elected officials, meanwhile, said a failure to resolve the issue could send ripple effects through credit markets and leave cities unable to fund healthcare and other services.

The dire warnings come as lawmakers appeared no closer to resolving a dispute between Biden, his fellow Democrats, and Republican lawmakers, who have declined to help lift the $28.5 trillion federal borrowing limit to pay for programs already authorized by Congress.

The U.S. House of Representatives is set to vote next week on a measure to resolve the showdown and a "continuing resolution" that could fund emergency spending on wildfire and hurricane disaster relief as well as the evacuation of refugees from Afghanistan, according to a letter from Majority Leader Steny Hoyer to colleagues.

A decision had not been made on whether to pair the debt ceiling and continuing resolution measures, according to a senior Democratic aide.

For months, Treasury Secretary Janet Yellen has urged Congress to act, saying cash and "extraordinary measures" being used to temporarily finance the government will run out next month. Some independent estimates see the deadline being in November.

Republicans, who lost control of the White House in the 2020 election, have balked and placed the potential crisis on Democrats' shoulders. Democrats hold control of the House and Senate by slim margins.

GRIM WARNINGS

A new White House fact sheet warned that the failure to come to an agreement could send ripples through U.S. financial markets and halt billions of dollars in aid for disaster relief efforts, infrastructure and education funding, not to mention the response to the COVID-19 pandemic.

"Economic growth would falter, unemployment would rise, and the labor market could lose millions of jobs," the White House said. "We expect Congress to act promptly."

The United States Conference of Mayors, a nonpartisan group representing 1,400 U.S. cities, added that "failure to increase the debt limit would send our economy into freefall" and that "this is no time to allow partisan politics to reverse the progress we've made."

Investors continue to bet that an increase or suspension of the debt ceiling will take place in time to avoid a default of any kind, but Goldman Sachs economists wrote in a note this week that the current go-round over the issue is "the riskiest debt-limit deadline in a decade."

A broad U.S. default would be unprecedented. U.S. government debt is considered a safe investment and a benchmark for financial contracts worldwide, but periodic partisan showdowns over the debt ceiling have raised doubts.

Goldman told its clients that the current deadline seems as risky as a 2011 standoff that led Standard & Poor's to lower its rating on U.S. sovereign debt and a 2013 crisis that coincided with a partial shutdown of the government.

Early signs of concern have begun to emerge in the Treasury market, with modest premiums seen in yields for bills due to mature in October and early November.

"The markets are assigning a small chance of problems," said Guy LeBas, chief fixed income strategist at Janney, an investment bank.

(Reporting by Trevor Hunnicutt, David Morgan, Susan Heavey, Dan Burns, Rodrigo Campos, Steve Holland and Susan Cornwell; Writing by Trevor Hunnicutt; Editing by Raissa Kasolowsky, Chizu Nomiyama and Andrea Ricci)

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