Q. Consider the following statements:
Statement-1: 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-2: 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
Correct answer: (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Question from UPSC Prelims 2024 GS Paper
Explanation:
Statement-1: 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.
This statement is correct. A default by the USA on its debt would mean that it fails to meet its debt obligations, and as a result, holders of US Treasury Bonds would not receive the payments they are entitled to.
Statement-2: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
This statement is also correct. US government debt is indeed backed by the “full faith and credit” of the US government, rather than by specific physical assets.
Since Statement-II explains why Statement-I would occur (i.e., the inability to pay bondholders is due to the debt being backed only by the government’s promise rather than hard assets), the correct answer is (a).