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Friday 15 July 2011
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The last time the US defaulted (and blamed the printer) As Americaâ??s politicians battle over the governmentâ??s debt ceiling, the US Treasury is thundering that a failure to raise the limit puts the nation on course to â??default on its legal obligations â?? an unprecedented event in American historyâ?. Alarming, but not quite correct. Grimace or grin? Back in 1979, mirroring today's events, Republicans were refusing to allow President Jimmy Carter, a Democrat, to raise the US debt ceiling. Photo: Rex Features12:57PM BST 15 Jul 2011
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The US has technically defaulted on its debt â?? failed to meet its payment obligations to holders of its Treasuries â?? 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 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.
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.
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14 Jul 2011The 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.
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 â??one-time, permanent ratchet upward of yieldsâ? â?? the rates of return demanded by investors to hold the USâ??s debt.
â??All other investors are a little bit weary of you, going forward,â? Terry Zivney, one of the paperâ??s authors, explained in a recent interview. â??Maybe next the time they'll be the person that doesn't get their $120m.â?
He and Richard Marcus, his co-author, calculated the ultimate impact was a 0.6 percentage point rise in the interest rates the US government had to pay on its debt. While that sounds tiny, that would signal that a $120m mistake â?? paltry compared to the total government debt even then â?? meant the US had to pay billions more each year in interest.
The US public may also have taken a more direct hit. Since yields on government debt and interest rates within the wider economy tend to move together, the professors have argued the pick-up in yields contributed to the painful interest rates the US faced in the Eighties.
"What is clear from the data is that the default in early 1979 did appear to be part of the 'cause' of the well-publicised increase in interest rate levels suffered in the first half of the 1980s," they wrote. "Perhaps too much blame for the higher interest rates has been leveled at the Federal Reserve for a change in monetary policy, where a portion of the blame should be assigned to Treasury."
Little wonder then, that the US Treasury might prefer to think that a default would be â??unprecedentedâ?.
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