UPSC CSE 2024 · PYQ · International Finance / Sovereign Debt · hard
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?
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
Explanation
US Treasury Bonds are debt obligations of the US Government. Even in a default scenario, bondholders' contractual claims to receive payment still legally exist — they do not vanish; rather, payment may be delayed or restructured. So Statement-I is incorrect. However, US Government debt is indeed not backed by any physical or hard assets like gold; it rests solely on the "full faith and credit" of the US Government — this is a well-known feature of sovereign fiat debt. So Statement-II is correct. Hence the answer is (d).
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