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

Charles W. Mooney, JrThe extent and nature of the impact of a U.S. default and restructuringalso would be an important aspect of designing the exemptionsfrom default contemplated by alternative approaches discussed inPart III.B. Determining which classes of beneficial holders wouldqualify for the exemption would require much care in analyzing exante the likely effects of the scheme if implemented. Exempting domesticholders might be politically essential in order to garner Congressionalsupport. That would mean that foreign holders wouldbear the first-line brunt of a default and restructuring, which wouldpose political as well as diplomatic risks and also might impair theachievement of a successful restructuring. 7 Moreover, exempting toomuch of the U.S. debt would undermine the whole purpose of restructuring.175For the most part, this paper proceeds on the basis that the chief(and obvious) benefit of a restructuring for the U.S. would be theactual or de facto reduction in principal of U.S. Treasury obligations(whether in legal effect or by virtue of selective default). 8 As a generalmatter, it is better to owe less debt than more debt, especially if debtis reduced other than by way of payment of principal. But the centralobject of this essay is to explore how the U.S. might restructure itsTreasury debt.7 To reiterate, I make no claim here as to the likely benefits or costs of a restructuringthat would discriminate against either foreign holders or domestic holders or thatwould instead adopt an approach of intercreditor equality. The goal here is to explorewhether such discrimination would be possible and how it might be achieved. For arecent study on intercreditor equity in ten recent sovereign debt restructurings, seeAitor Erce & Javier Diaz-Cassou, Selective Sovereign Defaults (May 4, 2011), availableat http://www.webmeets.com/files/papers/SAEe/2011/299/Erce_intercreditor_equity.pdf.Erce and Diaz-Cassou identify Belize, the Dominican Republic, Ecuador,and Pakistan as examples of restructurings that discriminated against external(foreign) creditors. Id. at 17-18. As examples of discrimination against domesticcreditors, they identify Argentina, Russia, and (“to a lesser extent”) Ukraine. Id. at20-21. They identify Uruguay, Grenada, and Dominica as examples of a neutral approach.Id. at 19-20. The United States has it own history of discrimination againstforeign creditors. See, e.g., Wythe Holt, The Origins of Alienage Jurisdiction, 14 Okla.City U. L. Rev. 547, 553-62 (1989) (discussing discrimination by state legislaturesagainst British creditors during the years following the Revolutionary War).8 As explained below, under the Alternative 2 approach, the Treasuries obligationswould not be reduced as a legal matter, but the U.S. would declare itself unwillingto pay X% of the principal obligations. Under Alternative 3, obligations would actuallybe reduced but only on a consensual basis.