To the long list of dire consequences if the United States defaults on debt obligations, here’s an addition you probably haven’t considered: litigation against the U.S. government for missed payments.
Let’s establish at the outset that if American owners of Treasury bills or U.S. bonds are counting on a suit against the U.S. government to recover any losses stemming from a default, their faith is misplaced. Litigation takes a long time in this country, especially when you’re talking about completely unprecedented claims arising from unique, unforeseeable circumstances. It’s just about unfathomable that the United States will fail to meet its obligations to bondholders for as long as it would take them to obtain a judgment, even assuming that bondholders somehow defied all reasonable expectations and managed to win their case. For that hypothetical to be realized, our economy would have to be so devastated that bondholder litigation would be a relatively small worry.
But what about a suit by foreigners who own U.S. debt? Or even foreign sovereigns? I talked Wednesday with several foreign debt and constitutional experts, both in academia and private practice. They outlined a set of hypotheticals under which foreign owners of U.S. debt could sue the U.S. government in their own courts and even attempt to enforce judgment against the United States by seizing U.S. assets. Granted, the scenario is based on speculation that’s incredibly unlikely to come to pass. In these strange days, though, a little mind-bending is good exercise.
The first thing to know is that T-bills and U.S. bonds don’t come with complicated purchase agreements. U.S. debt is sold under the full faith and credit of the government as a simple obligation to pay. That’s different from, say, the Argentine bonds that have occasioned so much litigation in federal district court in Manhattan and at the 2nd Circuit Court of Appeals. Argentina agreed in its bond offerings to submit to the jurisdiction of U.S. courts, which have acted as the interpreters of Argentina’s contracts with bondholders. T-bills and U.S. bonds do not specify any jurisdiction to oversee disputes in the event of default. The instruments don’t even contemplate the possibility of default, which is just another indication of the dilemma we’re in right now.
If the U.S. government misses a payment, American debt holders who wanted to litigate would presumably sue in either U.S. district court or the U.S. Court of Federal Claims, which oversees (among other things) disputes between the federal government and U.S. contractors. Jurisdiction would be a threshold question of first impression, in which the courts would have to determine whether there’s a contract between the government and debt holders.