The same holds true for the federal government. Debt default is a scar the U.S. would bear for life. With $11.9 trillion of publicly held debt, about half of which is held by foreigners, the U.S. can’t afford to instill doubt in the minds of bondholders. The Treasury was late in redeeming T-bills in 1979, and rates shot up by 60 basis points even though the delay was a result of a back-office glitch.
“It was small. It was unintentional. But it was indeed a default,” the Urban Institute’s Donald Marron wrote.
If you still think the Treasury is going to look the other way and let the computer system pay bills in the order in which they are due, think about this.
“Treasury debt is the currency on which the U.S. financial system is based,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, N.J.
Treasuries serve as collateral for hundreds of billions of dollars of repurchase agreements between financial institutions each day. They are a key component of bank balance sheets, are widely held by money-market mutual funds and make up more than half the Federal Reserve’s assets. The dollar is the world’s reserve currency. If the full faith and credit of the U.S. government is suspect or in any way compromised, the system collapses.
Your move, Mr. Secretary.