Treasury secretary Tim Geithner announced that he was suspending payments into two federal pension funds, after the government reached its maximum legal borrowing limit. Geithner said the suspension should allow the US to avoid a default before 2 August (previously set to 8 July) and urged Congress to agree to raise the debt ceiling before this 11-week deadline expires.
The US Treasury expected to reach the $14.3 trillion limit on on Monday. Congress needs to raise the legal debt ceiling beyond its current limit, which will require Republicans and Democrats reaching agreement over an issue that bitterly divides them. President Barack Obama warned over the weekend that failure to raise the ceiling risks unravelling the world's financial system.
The US is cutting payments into the funds to allow it to keep borrowing while a deal on a higher debt ceiling is agreed.
The US Congress has set a limit on the total level of national debt since 1917.
The ceiling is periodically renegotiated but has become something of a political football as both Democrats and Republicans try to extract concessions in exchange for increasing the limit.
America's debt has become a sharp dividing line between the two parties and will be in next year's presidential election. John Boehner, the Republican leader of the House of Representatives, wants The White House and Democrats in Congress to agree to trillions of dollars in spending cuts before Republicans give the nod to any increase. Joe Biden, the vice-president, has been tasked with leading negotiations between the administration and leaders on both sides of the aisle in Congress.
"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," President Obama said late on Sunday.
The US said that the retiree funds will be "made whole" once the ceiling has been raised and former government workers won't be affected.
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