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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 ?
Explanation
The correct answer is option A because both statements are accurate and Statement-II explains Statement-I.
Treasury securities are backed by the full faith and credit of the United States, meaning that the government promises to raise money by any legally available means to repay them.[1] This confirms Statement-II is correct—US government debt is not secured by tangible hard assets like land or gold, but only by the government's promise to honor its obligations.
Statement-I is also correct because in the event of a US government default, bondholders would face significant difficulty enforcing their claims. Lenders may demand collateral (security) against loans. Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.[2] Since US Treasury bonds lack such collateral backing, bondholders cannot seize specific assets to recover their money.
Statement-II directly explains Statement-I: the inability to enforce claims upon default exists precisely because the debt has no hard asset backing—it relies solely on governmental faith and credit.
Sources- [1] https://en.wikipedia.org/wiki/United_States_Treasury_security
- [2] Understanding Economic Development. Class X . NCERT(Revised ed 2025) > Chapter 3: MONEY AND CREDIT > TERMS OF CREDIT > p. 43
PROVENANCE & STUDY PATTERN
Guest previewThis question is a classic 'Headline to Textbook' conversion. The 2023-24 US Debt Ceiling crisis was the news; UPSC didn't ask about the ceiling limit but tested the fundamental definition of 'Sovereign Debt' (Fiat nature) vs 'Secured Debt'. It rewards conceptual clarity over fact-hoarding.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: If the United States government were to default on its debt, can holders of US Treasury bonds legally enforce claims to receive payment?
- Statement 2: Is United States government debt backed by any hard assets, or is it backed only by the government's "full faith and credit" (i.e., not by specific hard assets)?
- Statement 3: Does the absence of hard-asset backing (being backed only by "full faith and credit") explain why Treasury bondholders would be unable to enforce payment in the event of a US government default?
Provides a clear definition of 'default' as non-payment when any part of the debt is due and not repaid — a legal characterization of the event.
A student could combine this definition with knowledge of US Treasury bond payment schedules and court systems to ask whether non-payment meets legal criteria for remedies.
States that a debt security represents borrowed money that 'must be repaid' with defined terms for amount, interest and maturity — implying contractual rights of holders.
Use this rule plus basic contract law principles (e.g., creditors' rights) to explore whether Treasury holders would have enforceable contractual claims in court.
Defines government-issued bonds as debt instruments used to borrow funds for a defined period, treating them analogously to other bonds.
A student could extend this by comparing legal remedies available to private bondholders (e.g., suing for breach) to those potentially available against a sovereign issuer like the US.
Explains 'debt restructuring' and that creditors may have to accept haircuts or swaps — an example of negotiated outcomes when borrowers face distress.
Combine this pattern with the possibility of sovereign distress to consider that enforcement might be altered by political or negotiated processes rather than simple court-ordered payment.
Gives a definition of legal tender as money a creditor is under compulsion to accept — relevant to what forms of payment might discharge debt obligations.
A student could use the legal-tender concept plus knowledge of US currency and courts to examine whether offering legal-tender currency affects enforceability or discharge of Treasury claims.
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