When Did The U.S. Last Default On Treasury Bonds?

A potential default on U.S. treasury bonds isn't as unprecedented as politicians would have you think. In 1979, the U.S. failed to make timely payments to its bondholders — and the results weren't pretty. Robert Siegel speaks with Ball State University finance professor Terry Zivney, who co-authored a journal article called "The Day the United States Defaulted on Treasury Bills," about the results of that last default.

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ROBERT SIEGEL, host:

Politicians and commentators commonly speak of a potential default on U.S. Treasury bonds as something unprecedented. But back in 1979, the country did get a glimpse of what happens when we don't pay bondholders in full and on time. And it's not pretty.

More than 20 years ago, professor Terry Zivney, who's now a professor of finance at Ball State University in Indiana, co-authored a journal article called "The Day the United States Defaulted on Treasury Bills." Professor Zivney, welcome to the program.

Professor TERRY ZIVNEY (Finance, Ball State University): Thank you for having me.

SIEGEL: And take us back to the spring of 1979. How was it that the Treasury did not redeem some Treasury bills that came due in April and May?

Prof. ZIVNEY: Well, that's a little bit of a mystery even to me. I believe it was similar to the situation we have now, where Congress was debating raising the debt ceiling. And in the process of all these - the wrangling going on, some of the little paperwork details, like writing checks, got lost in the process. And so they didn't get written.

SIEGEL: The Treasury actually pleaded that they had bookkeeping problems, computer problems in paying off people.

Prof. ZIVNEY: Oh, they said, yes. They said there were technical errors, word-processing errors. But I'm sure the thousands of people that did not receive their $120 million were not, you know, mollified by hearing it was just a technical difficulty.

SIEGEL: A hundred-twenty million dollars was the amount of federal debt that was at issue. You apply the dictionary definition of default, and this was a default on the debt they held. But $120 million was a tiny sliver of the Treasury's debt.

Prof. ZIVNEY: Yes, it was. The Treasury had around $800 billion outstanding at that time, so it was a very small proportion. However, professor Richard Marcus of the University of Wisconsin, Milwaukee, and I did some research. And we concluded that the defaults of 1979 raised the interest rates that the government had to pay on their securities by about six-tenths of 1 percent.

SIEGEL: Six-tenths of 1 percent - not on $120 million, but you're saying on the 800 billion, almost a trillion dollars.

Prof. ZIVNEY: Yes. And so six-tenths of 1 percent of a trillion dollars is around $6 billion a year on a $120 million mistake.

SIEGEL: Now, you say that the cost of this small default in 1979 was an increase in the interest rates the government was paying of six-tenths of 1 percent - at the rate of six-tenths of 1 percent a year. For how long did the Treasury still have to pay that - if you will, that premium for default, or when did it go away?

Prof. ZIVNEY: Well, I can't say for sure when it went away. During the period of our study, which was over a year - six months on either side of this default - we saw no signs of that extra rate going away.

SIEGEL: But everyone could see that the Congress did get around to extending the debt limit, and they were going to continue paying off all of the government's creditors. That didn't bring the rate right down a couple of days after all this happened?

Prof. ZIVNEY: No, it didn't. In our study, we found that the rate stayed up at least through the end of our study, which was six months after the original default. There was no sign that the rates were declining.

So I think the markets remember. They say OK, you had a problem; you had a blemish - again, just like any individual case. All other investors are a little bit weary of you, going forward. Maybe next the time they'll be the person that doesn't get their $120 million.

SIEGEL: Well, professor Zivney, thank you very much for talking with us.

Prof. ZIVNEY: Ah, you're more than welcome. Thank you for having me.

SIEGEL: Professor Terry Zivney, a professor of finance at Ball State University in Muncie, Indiana.

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