Update | Trump plays fast and loose in remarks on US debt as markets cringe
US owes China over US$1 trillion
Would Donald Trump really consider not paying portions of the US debt? The prospect riled economists on Friday as stories in the New York Times and the conservative website The Blaze cast fresh scrutiny on comments Trump made a day earlier.
Responding to a question about the national debt, the likely Republican presidential nominee said in an interview on CNBC on Thursday he would “borrow knowing that if the economy crashed you could make a deal.”
When asked if that meant he had taken a page from his own playbook as a businessman and try to get US creditors to accept less than the full value of the bonds they hold, he said “No,” but added: “I could see long-term renegotiations where we borrow long-term at very low rates.”
The reaction to his words on Friday offered the first-time political candidate a taste of how delicate the prospect of discussing economic and fiscal policy can be. It also highlighted a danger for Trump as his campaign moves from a crowded, personality-fuelled contest for the Republican nomination to a general election competition where the media and members of the public expect more policy details from the candidates.
“Such remarks by a major presidential candidate have no modern precedent,” the New York Times wrote in a story saying Trump’s plan implied he would “negotiate a partial repayment” of US debt.
“It’s beyond ludicrous and irresponsible unless you’re, say, an emerging market country,” wrote the US debt analyst David Ader, the head of rates strategy at CRT Capital, in a note to clients early Friday morning.
A senior campaign adviser said Trump had not meant to suggest he would demur on any US debt payments.
“Mr. Trump was clear in saying that he was not going to renegotiate US debt, despite being asked multiple times, and that he would not default on US debt, despite being asked multiple times,” said the adviser, who did not want to be identified because he was not authorised to speak publicly.
“All he said is that he believes that long term low interest Treasuries would be a better deal for the US taxpayer.”
Still, four Trump companies have been through bankruptcies in which his creditors were forced to accept far less than the more than US$4 billion he owed them, and in the CNBC interview he spoke of loving to “play with” debt.
“The United States is nowhere near debt distress,” said Charles Seville, an analyst at Fitch Ratings Inc. who focuses on government debt.
Seville said if the US government were to choose not to repay creditors, it would “undermine faith in the United States’s ability to borrow at low rates which is the underpinning of its high credit rating,” adding, “there’s no quick way of reducing the debt burden. It’s something that would be a product of fiscal consolidation or faster growth.”
Moreover, given that US Treasuries are viewed as the safest-of-safe securities globally, underpinning the dollar’s status as the world’s preferred reserve currency, any damage to that reputation would likely unleash far-flung consequences in financial markets worldwide.
The US government regularly issues Treasury bills, notes and bonds maturing in a range of between four weeks and 30 years. Currently, interest rates on US government debt are near historically low levels, meaning the government is able to borrow cheaply. The Treasury Department has been gradually moving more of its obligations into longer-term debt to take advantage of the low rates.