Consider the following statements: Statement-I: If the United States of America (USA) were to default on its…
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?
Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
Statement-I is correct, but Statement-II is incorrect
Statement-I is incorrect, but Statement-II is correct
Solution
US Treasuries are 'full faith and credit' obligations of the US Government — they are not backed by any hard collateral. A sovereign default would therefore leave bondholders without enforceable claims, so Statement-II explains Statement-I.