Politicians should not play chicken with the country's credit rating, but need to focus urgently on finding ways to reduce the rising budget deficit, according to the head of General Motors Co.

The battle between President Barack Obama's Democratic Party and the opposition Republicans over whether to raise the limit on government borrowing from its current $14.3 trillion level plays a dangerous game with default, Daniel Akerson, chief executive of the largest U.S. automaker said on Tuesday.

We shouldn't underestimate that and play chicken with our national credit rating, our national honor, Akerson said at GM's first annual shareholder meeting since emerging from bankruptcy in 2009.

If the government does not raise the nation's borrowing limit by August 2, the nation runs the risk of defaulting.

That would shake the credit markets tremendously, Akerson said.

GM received a $52 billion taxpayer-funded bailout and the U.S. government still owns a 32 percent stake in its common stock, following the company's November initial public offering.

Some investors see the government's continued stake in GM as an overhang on the shares, which have lost some 22.5 percent of value so far this year, at a time when the broad Standard & Poor's 500 index is up 2 percent.

The stake remains a consideration for GM's board, which is delaying any decision on whether to start buying back shares until after the Treasury Department decides what to do with its stake.

Akerson said the government has said it would review the situation in late summer after GM reports second-quarter results, and pointed out Treasury wants to exit its stake as soon as it can.

Sources told Reuters last month that the Treasury Department plans to hold its shares until at least August.

The primary driver of any further balance sheet activities will, I think, in the near term be driven by the government's decision of when or when they will not exit the company, Akerson said.

ECONOMY THE BIG WORRY

The shaky U.S. economy, facing stubbornly high unemployment and volatile oil prices, is one of the main worries facing GM, Akerson said.

There's a lot of uncertainty about a jobless recovery, how strong is the recovery going to be? There's a lot of concern about oil prices, said Akerson, who joined the company from private equity firm Carlyle Group.

This company, more than any other I have been associated with, is more closely tied to the gross domestic product.

Economists and government officials have called recent U.S. economic reports on economic activity and employment disappointing, raising concerns that the nation may be sliding back toward recession.

NO 'VICTORY LAP'

U.S. automakers have been the nation's first major industry to show evidence that the economy may be slowing again after a tepid recovery from a brutal recession.

GM's U.S. auto sales in May fell short of analysts' expectations, as higher prices and lower incentives by the company and many of its larger rivals led consumers to put off purchases in the face of a weakening economy.

Industry-wide, May sales fell 3.7 percent from last year to an annualized rate of 11.8 million. That fell far short of the 12.6 million expected by a Reuters poll of economists and was the lowest rate since September 2010.

No one is doing a victory lap, Akerson said, flanked by two new GM cars -- the Buick Verano and Chevrolet Sonic. We have a lot to do.

The company aims to increase manufacturing of its high-end Cadillac vehicles overseas in the next 18 to 24 months to strengthen that luxury brand outside the United States, he said, without providing further details.

GM currently builds a small number of Cadillacs in a joint venture in China and sells it in European and Asian markets.

GM's shares rose 29 cents, or 1 percent, to $28.85 on the New York Stock Exchange in afternoon trading.

Investors will also get a deeper look into rival Ford Motor Co later on Tuesday when that company's management meets with analysts to lay out their long-term growth strategies, particularly for China and India.

Akerson acknowledged GM still faces many challenges, but reiterated it is focused on building a fortress balance sheet. GM had about $36.5 billion in cash and available liquidity at the end of the first quarter.

We've strung five consecutive quarters of profitability together, but no one said this was going to be a lay-up, he said. There's a lot of work to be done over the next couple of years, not only at General Motors but throughout the industry.

(Reporting by Ben Klayman, additional reporting by Deepa Seetharaman; Writing by Scott Malone; Editing by Maureen Bavdek)

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