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Top US bankers warn against prioritizing interest payments: WSJ

Paul Giamou | Aurora | Getty Images

Top U.S. bankers have warned the Obama administration and Republican lawmakers that any move to pay interest on debt before obligations such as Social Security and payments to veterans would pose severe risks to financial markets and the economy, The Wall Street Journal reported.

Some lawmakers think prioritizing interest payments would placate bond investors if the government breaches its borrowing limit, the Journal said.

(Read more: US isn't only one playing fast and loose with debt)

However, heads of the nation's largest financial institutions told the officials in meetings that prioritizing some payments would create insurmountable uncertainty for investors, drive up borrowing costs and disrupt markets, the Journal said, citing people familiar with the meetings.

As the U.S. government moved into the second week of a shutdown on Monday with no end in sight, a deadlocked Congress also faced an Oct. 17 deadline to increase the nation's borrowing power or risk defaulting on its debt.

(Read more: Plunge in US shares coming in early 2014: SocGen)

If no deal is reached, many outside observers including debt-ratings firms assume the government will begin prioritizing payments to bondholders over others, rather than risk defaulting on its debt, the Journal said.

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