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 ✓ UPSC's answer
- (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
Why the answer is (a)
• US Treasury securities are unsecured obligations: they are backed by the 'full faith and credit' of the US Government — its taxing power and promise to pay — not by gold or any other hard asset; Statement-II is correct.
• Because there is no collateral to seize, if the US defaulted (for example by failing to raise the debt ceiling), bondholders could not enforce their claims against specific assets and would simply not be paid on time; Statement-I is correct.
• The absence of hard-asset backing is exactly why default would leave holders without recourse, so Statement-II explains Statement-I.
• This is why debt-ceiling standoffs in the US unsettle global markets, since Treasuries are the world's benchmark 'risk-free' asset.
• Hence option (a).
Why the other options are wrong
- (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain…
- The lack of asset backing is exactly why default leaves holders without recourse, so II explains I.
- (c) Statement-I is correct, but Statement-II is incorrect
- Statement-II is correct: US debt is backed only by government faith and credit.
- (d) Statement-I is incorrect, but Statement-II is correct
- Statement-I is correct: on default, bondholders cannot enforce payment.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2024, held on 16 June 2024. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.