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 ?
Show answer
Answer: A. Statement I is correct: if the US defaults, bondholders have no assets they can seize and the US government cannot be forced to pay, so they cannot enforce their claims. Statement II is correct and explains it: US government debt is backed only by the 'full faith and credit' of the government, not by any physical collateral. So both are correct and II explains I.
Watch for: Students think a default only delays payment, but the point is that there is no collateral to claim.
Why the other options are wrong
- B. Wrong because the lack of hard-asset backing is exactly why claims cannot be enforced.
- C. Wrong because US debt really is backed only by the government's credit.
- D. Wrong because, in a default, bondholders have nothing they can claim against.
Source to check: US Department of the Treasury, TreasuryDirect (description of 'full faith and credit'); Federal Reserve educational material on US Treasury securities
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.