Subject: NYT: Donald Trump’s Idea to Cut National Debt: Get Creditors to Accept Less
From: "Vinocur, Claire" <[email-masked]>
To: Comm_D <[email-masked]>
Date: Fri, 6 May 2016 12:13:51 -0700

This is in the daily Sarge worked on today, but there are a couple really good lines I wanted to make sure we all saw.

Donald Trump’s Idea to Cut National Debt: Get Creditors to Accept Less<http://www.nytimes.com/2016/05/07/us/politics/donald-trumps-idea-to-cut-national-debt-get-creditors-to-accept-less.html>

By BINYAMIN APPELBAUM<http://topics.nytimes.com/top/reference/timestopics/people/a/binyamin_appelbaum/index.html> MAY 6, 2016

One day after assuring Americans he is not running for president “to make things unstable for the country<http://www.nytimes.com/2016/05/05/us/politics/donald-trump-president.html>,” the presumptive Republican nominee, Donald J. Trump<http://www.nytimes.com/interactive/2016/us/elections/donald-trump-on-the-issues.html?inline=nyt-per>, said in a television interview Thursday that he might seek to reduce the national debt by persuading creditors to accept something less than full payment.

Asked whether the United States needed to pay its debts in full, or whether he could negotiate a partial repayment, Mr. Trump told the cable network CNBC, “I would borrow, knowing that if the economy crashed, you could make a deal.”

He added, “And if the economy was good, it was good. So, therefore, you can’t lose.”

Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities<http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/treasury_securities/index.html?inline=nyt-classifier> are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.

Experts also described Mr. Trump’s vaguely sketched proposal as fanciful, saying there was no reason to think America’s creditors would accept anything less than 100 cents on the dollar, regardless of Mr. Trump’s deal-making prowess.

“No one on the other side would pick up the phone if the secretary of the U.S. Treasury tried to make that call,” said Lou Crandall, chief economist at Wrightson ICAP. “Why should they? They have a contract” requiring payment in full.

Mr. Trump told CNBC that he was concerned about the impact of higher interest rates on the cost of servicing the federal debt. “We’re paying a very low interest rate,” he said. “What happens if that interest rate goes two, three, four points up? We don’t have a country. I mean, if you look at the numbers, they’re staggering.”

Indeed, the Congressional Budget Office projects<https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51129-2016_Outlook_Summary.pdf> that interest payments on the federal debt will climb to $500 billion in 2020 from roughly $250 billion this year. That is based on a projection that rates on the benchmark 10-year Treasury will reach 4.1 percent in late 2019, still a low level by historical standards. If rates were to climb more quickly, or reach higher levels, debt payments would be higher.

Pressed to elaborate on his remarks, Mr. Trump did appear to step back. He said that he was not suggesting a default, but instead that the government could seek to repurchase debt for less than the face value of the securities. The government, in other words, would seek to repay less money than it borrowed.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said that she shared Mr. Trump’s concern about the size of the federal debt, but that the issue needed to be addressed through changes in fiscal policy — some combination of less spending and more revenue.

“It’s a policy problem, not a debt-management problem,” she said. “When it comes to fiscal responsibility, people are always looking for the easiest of answers. If there were low-hanging fruit here, the Treasury Department would already be on it.”

Repurchasing debt is a fairly common tactic in the corporate world, but it only works if the debt is trading at a discount. If creditors think they are going to get 80 cents for every dollar they are owed, they may be overjoyed to get 90 cents. Mr. Trump’s companies had sometimes been able to retire debt at a discount because creditors feared they might default.

But Mr. Trump’s statement might show the limits of translating his business acumen into the world of government finance. The United States simply cannot pursue a similar strategy. The government runs an annual deficit, so it must borrow to retire existing debt. Any measures that would reduce the value of the existing debt, making it cheaper to repurchase, would increase the cost of issuing new debt. Such a threat also could undermine the stability of global financial markets.

In 1979, for example, what the government described as “bookkeeping problems” temporarily delayed $120 million in interest payments. In the aftermath of the delay, investors pushed up interest rates on Treasuries by about 0.6 percentage point, according to a 1989 study by Terry L. Zivney of the University of Tennessee at Chattanooga, and Richard D. Marcus of the University of Wisconsin-Milwaukee. That cost taxpayers roughly $12 billion.

In 2011, federal borrowing costs climbed as congressional Republicans refused for a time to increase the federal government’s statutory borrowing limit, raising doubts about the government’s ability to repay its debts. The Bipartisan Policy Center calculated that the higher rates will cost taxpayers about $19 billion.

There is a limited opportunity for Mr. Trump to pursue bond buybacks without disrupting markets. He could seek to take advantage of the market’s preference for brand-new Treasuries. In a longstanding quirk, older vintages of Treasuries trade at slightly lower prices than the latest issuance. Treasury officials have discussed issuing new debt to fund purchases of older debt, but they would do so because newer securities are easier for investors to buy and sell. That might improve the workings of financial markets. Any savings, however, would be small change.

“It would not move the needle at all on the overall debt,” Mr. Crandall, the economist, said.