Obama: 'We can't make extortion routine as part of our democracy'
President Barack Obama speaks during a press conference at the White House on Oct. 8, 2013. Photo via Agence France-Presse.

Failure to raise the debt ceiling would cause the United States to default on its bills, a situation "dramatically worse" than the current government shutdown, President Barack Obama warned Tuesday.

But he also sought to assure jittery markets and nervous countries that the US would honor its debts despite the looming deadline for Congress to raise the borrowing cap and avoid a cash crunch.

"As soon as Congress votes to reopen the government, it's also got to vote to meet our country's commitments, pay our bills, raise the debt ceiling," Obama told a press conference.

"As reckless as a government shutdown is, the economic shutdown caused by America defaulting would be dramatically worse," he added.

Obama criticized rival Republican Party lawmakers for setting unrelated conditions before they would agree to pass a new budget and raise the debt ceiling.

Members of Congress "don't get to demand ransom in exchange for doing their jobs," he said.

The shutdown of non-essential federal government services was in its eighth day Tuesday, with hundreds of thousands of workers furloughed, or sent home without pay, after Congress failed to pass a budget for the 2014 fiscal year that began October 1.

Meanwhile the $16.7 trillion US borrowing ceiling needs to be raised by October 17, when the Treasury says it will run out of cash and lack the funds necessary to fund a chronic deficit of about $60 billion a month.

But Republican House of Representatives Speaker John Boehner has warned that he will not allow Congress to raise the ceiling unless Obama offers concessions on his signature reform law that expanded health-care coverage.

Obama blasted that stance.

"We can't make extortion routine as part of our democracy. Democracy doesn't function this way. And this is not just for me. It's also for my successors in office, whatever party they're from," he said.

Meanwhile he sought to assure investors, US bond holders and others that the US remained good for its debts, even as he acknowledged "a cloud" over America's economic credibility because of the shutdown.

"Obviously my message to the world is the United States always has paid its bills and it will do so again," Obama said.

Asked what the government would do if the debt ceiling were not increased on time and the government would have to decide which bills not to pay, Obama said the issue was still being reviewed.

"No option is good in that scenario," he said. "We are exploring all contingencies."