UPSC Prelims 2024 Q51: Indian Economy – International Institutions & Reports
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?
- (a) Both Statement - I and Statement - II are correct and Statement - II explains Statement - I
- (b) Both Statement - I and Statement - II are correct, but Statement - II does not explain Statement - I
- (c) Statement - I is correct, but Statement - II is incorrect
- (d) Statement - I is incorrect, but Statement - II is correct
Answer: (a) Both Statement - I and Statement - II are correct and Statement - II explains Statement - I
Explanation
US Treasury bonds and the risk of default
| Statement | Verdict | Reason |
|---|---|---|
| I. If the USA defaulted, bondholders could not enforce their claims | Correct (as per UPSC key) | A sovereign cannot be forced to pay like a company; there is no court or bankruptcy process to seize US assets |
| II. US debt is backed only by the government's faith, not hard assets | Correct | Treasuries are backed by the 'full faith and credit' of the US government, not by gold or property |
Statement II explains Statement I: because no specific assets back the debt, holders have nothing to seize in a default.
Background:
| Term | Meaning |
|---|---|
| Debt ceiling | Congress's legal cap on US federal borrowing; stand-offs raise default fears (2011, 2023) |
| Gold standard | Ended in 1971 (Nixon shock); since then US debt and dollars are fiat |
| Sovereign immunity | A state cannot be sued in its own courts without consent |
Answer: (a) Both Statement - I and Statement - II are correct and Statement - II explains Statement - I.
Why each option is right or wrong
- (a) CORRECT. US debt rests only on 'full faith and credit', so in a default holders would have no assets to claim.
- (b) Incorrect. Statement II is the reason holders cannot enforce claims, so it does explain Statement I.
- (c) Incorrect. Statement II is true; US Treasuries are not backed by gold or other hard assets.
- (d) Incorrect. Statement I is true; sovereign debt cannot be enforced like a secured company loan.
Key point
US Treasuries are backed only by the 'full faith and credit' of the government; a sovereign default leaves no assets to seize.
Remember
US government debt is backed only by faith and credit, not by hard assets.
Common mistakes
- Assuming US debt is backed by gold; the link ended in 1971.
- Thinking bondholders can take the US to bankruptcy court like a company; there is no sovereign bankruptcy process.
- Treating the two statements as unrelated; the lack of hard backing is why claims cannot be enforced.
Exam tip
Fiat debt = trust, not collateral. If nothing backs a loan, the lender has nothing to seize.
Sources
- TreasuryDirect (US Department of the Treasury, Bureau of the Fiscal Service) — Treasury Securities: Bills, Notes and Bonds
- NCERT Class XII — Introductory Macroeconomics (Government Budget and the Economy)