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

178 United States Sovereign Debt: A Thought Experiment On Default And Restructuringgovernments of Cuba, Iran, and North Korea. Societe Generale alsohas made credits to its customers, who include both individual holdersand other banks—and so on. The example reflects the “tiered,”“intermediated” securities holding systems.The significance of the U.S. not knowing the identity of its Treasuriesholders would depend on its approach to a possible restructuring.For example, were the U.S. to pursue bilateral negotiationswith China and Japan, any resulting restructuring agreement wouldnecessarily involve identification of the particular Treasuries held bythe non-U.S. party. Such an approach would have several drawbacks,however. For example, it is plausible that neither China nor Japanwould agree to treatment that is different from that afforded by theU.S. to other, similarly situated Treasuries holders. Moreover, andsignificantly, obtaining sufficient leverage in the negotiations mightrequire the U.S. to be prepared to make a credible threat of defaultand restructuring absent an agreed solution. On any maturity dateof an issue of Treasuries, because the U.S. could not determine which(if any) portion of the Treasuries were held by China or Japan, Chinaand Japan would assume that the U.S. would be forced to default onthe entire issue. Because the majority of the outstanding U.S. debt isheld domestically, including by individuals and pension funds in theU.S., any threat of a general default might not be credible. In contrast,the U.S. would prefer a credible threat of a selective default toonly certain Treasuries holders. Subpart B outlines a novel approachthat could allow the U.S. to pose such a credible threat.Even if the U.S. could present a credible threat of selective default,there are other difficulties with pursuing bilateral negotiations withonly selected large Treasuries holders. Once a holder is made awareof a possible default, they could move quickly to exit the market(i.e., sell the Treasuries) based on the nonpublic information. Becausehuge holdings such as those of China and Japan could notbe liquidated quickly, the U.S. would desire to avoid extended andlengthy negotiations. It probably would be necessary to present toselected holders finalized restructuring arrangements on a take-it-orleave-itbasis. The proposal probably would be enhanced by a planto impose an across-the-board restructuring along the lines described