US Government Debt Different - Finance Department - University of ...

174 United States Sovereign Debt: A Thought Experiment On Default And Restructuringout, “unthinking” may be a better characterization for the conventionalwisdom. Nevertheless, it has become clear to many, includinga majority of members of Congress, that continuing to print moneyto pay U.S. obligations is not sound monetary policy.Today at a cabinet meeting in the White House, the prospect for abold new approach surfaced. Following a briefing on the economyand the U.S. fiscal situation by the Treasury Secretary, the AttorneyGeneral asked a simple question: “Secretary Cain, I understand thatthe U.S. now is a distressed debtor. Could you tell us about your contingencyplans for restructuring our debt?” The AG, clearly, was nowthe proverbial “skunk at the picnic.” But the Treasury Secretary wasat first speechless. There were no plans, of course. Speaking of defaultand restructuring of U.S. debt had always been taboo. But the AG,a former Circuit Judge, District Judge, and bankruptcy lawyer, wasundeterred. The AG pressed her case, but the Treasury Secretary’sonly response was the unsurprising: “Seems to me that you are askingme a legal question.” Following this exchange, the President askedthe AG to come up with a plan.The remainder of this paper focuses primarily on default and restructuringfrom the standpoint of the AG.Of course, the benefits of reducing the U.S. obligations on Treasurieswould be offset against the resulting costs. A default and restructuringcould result in increases in the cost of borrowing by the U.S. inthe future or even fundamental damage to the Treasuries market.Perhaps the most significant specter posed by a default would be theloss of continued access to the capital markets. Moreover, the significanceof the Treasuries market both nationally and globally and therole of the dollar as a reserve currency (or not) at the time also wouldbe significant. For example, a default and restructuring of U.S. Treasuryobligations could trigger economic crises in Europe and Asiaand could result in systemic defaults on the sovereign debt of multiplestates and financial institutions. The bottom line is that the U.S.would have to consider whether its default and restructuring wouldcause more harm to its economy (and other states’ economies) thanthe benefits of reducing its debt on a (presumably) one-time basis.