Presumptive Republican presidential nominee Donald Trump backtracked on a statement last week that he would renegotiate U.S. debt if the economy sours.
Trump said on CNN on Monday that he intended only to signal he would take advantage of a drop in the value of U.S. Treasury debt to save money by repurchasing debt on favorable terms.
“I said if we can buy back government debt at a discount -- in other words if interest rates go up and we can buy bonds back at a discount -- if we are liquid enough as a country, we should do that,” he said.
He called "ridiculous" suggestions that he would favor a default or forced restructuring that would require creditors to take a loss. “You never have to default because you print the money,” he added.
“I could see re-negotiations where we borrow at long term at very low rates,” he said on CNBC on May 5.
“I would borrow, knowing that if the economy crashed, you could make a deal," he said.
Trump’s comments last week provoked furious criticism. The Washington Post in an editorial the following day said the statement "sets a new record for economic recklessness."
Gene Sperling, former director of President Barack Obama’s National Economic Council, said in a conference call Monday arranged by Democratic front-runner Hillary Clinton’s campaign that Trump’s clarification wasn’t reassuring. It still amounts to
"openly toying with various forms of default on our debt," he said.
"He’s basically putting America in the position of saying, ‘I’m going to over-leverage and then if things look really terrible, if people fear that our debt will be worth less, I will come in and try to pay a discount,’” Sperling said. “That is one of the most dangerous economic things we’ve seen.”
Trump’s earlier statement had little initial impact on those who have the most direct interest, buyers and sellers of government debt.
The benchmark 10-year-yield fell 0.03 percentage point to 1.75 percent on the day of Trump’s comments last week. Treasury prices gained, a sign bond traders weren’t taking his comments as a serious threat to their investments.
“This is irresponsible talk,” Patrick Chovanec, New York-based chief strategist for Silvercrest Asset Management Group said last week. “If there was a belief that he would actually do it, I don’t know how markets would react. Clearly, they’re dismissing it at the moment as simply rhetoric, and not particularly well thought-out rhetoric.”
The market for U.S. Treasury debt is a linchpin for global financial markets because of its size, liquidity and perceived minimal risk of default. Interest rates for many other forms of debt such as home mortgages and corporate bonds are essentially priced in reference to yields on U.S. debt. A default would risk disrupting global markets and raising interest rates for corporate and consumer debt.
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