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 US 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-1 and Statement-II are correct, but Statement-II does not explain Statement-1
- C.Statement-I is correct, but Statement-II is incorrect
- D.Statement-I is incorrect, but Statement-II is correct
▶ Answer & Explanation
Correct answer: A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Government debt, such as US Treasury Bonds, is a promise to pay by the sovereign government. If a government defaults, it means it fails to honor this promise, and bondholders would indeed be unable to exercise their claims for payment. This debt is not secured by specific physical assets but relies on the government's creditworthiness and taxing power, often referred to as 'full faith and credit'. Therefore, Statement II accurately describes the backing of US government debt and explains why a default would prevent bondholders from receiving their payments.
Source: UPSC gs1 2024