UPSC Previous Year Question | Prelims GS | 2024

Consider the following statements: Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment. Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government. Which one of the following is correct in respect of the above statements?

  1. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  2. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  3. Statement-I is correct, but Statement-II is incorrect
  4. Statement-I is incorrect, but Statement-II is correct

Answer

Correct Answer

Statement-I is incorrect, but Statement-II is correct

Explanation

Statement I is incorrect because a US default would mean failure to make payments when due; it would not automatically extinguish bondholders' legal claims to repayment. Statement II is correct in the sense that US Treasury debt is a sovereign obligation supported by the government's taxing and borrowing capacity and its credit, rather than being directly collateralized by a specific pool of hard assets. The absence of specific asset backing does not mean bondholders lose their claims in the event of default.

Topics: indian economy, public finance, sovereign debt and government bonds, us treasury securities and default