However, the USA has defaulted before, and guess who it was?
As America’s politicians battle over the government’s debt ceiling, the US Treasury is thundering that a failure to raise the limit puts the nation on course to “default on its legal obligations – an unprecedented event in American history”. Alarming, but not quite correct.
The US has technically defaulted on its debt – failed to meet its payment obligations to holders of its Treasuries – as recently as 1979. The cause? Problems with the office equipment as deadlines approached, according to officials, which left a relatively tiny amount of debt repayments unmet for a few weeks.
Nonetheless, academics think the blip wreaked permanent damage, raising red flags as to the impact of current political wrangling.
Back in 1979, mirroring today’s events, Republicans were refusing to allow President Jimmy Carter, a Democrat, to raise the US debt ceiling. Then, the row was over raising it to $830bn, today, the question is whether to lift the $14.3 trillion limit (inflation, of course, has helped swell the figure).
The angry investors did eventually get their money, with back interest, and those holding debt maturing on May 17 were paid on time. US officials said what had happened could not even be classed as a default, merely a delay.
The approval to raise the debt ceiling did come at the last minute, but amid all the drama the cheques did not get written. In all, the US Treasury failed to pay around $120m to investors expecting their dues for Treasuries maturing on April 26, May 3 and May 10 that year.
Unfortunately, markets do not tend to care much about such niceties. A much-referenced academic paper, The Day the United States Defaulted on Treasury Bills, says the result of the technical default was a “one-time, permanent ratchet upward of yields” – the rates of return demanded by investors to hold the US’s debt.
“All other investors are a little bit weary of you, going forward,” Terry Zivney, one of the paper’s authors, explained in a recent interview. “Maybe next the time they’ll be the person that doesn’t get their $120m.”
Officials blamed a breakdown of word-processing equipment as they scrambled to prepare the cheques and the large numbers of small investors involved, which made the situation trickier.
- Default from 1979 offers clues on debt crisis (cbsnews.com)
- The day the US defaulted on treasury bills (csmonitor.com)
- Debt Ceiling, U.S. Default, and What’s Next (bargaineering.com)
- What Happened the Last Time the U.S. Defaulted on It’s Debt(ambitionamongotherthings.wordpress.com)
- When Did The U.S. Last Default On Treasury Bonds? (npr.org)
- Why Wall Street doesn’t seem worried about default (seattletimes.nwsource.com)
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