Yellen Warns on Default When Asked About Trump Debt Idea

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By Jonathan Nicholson

June 21 — Asked about presumptive Republican presidential nominee Donald Trump’s remarks about investors accepting less than face value for U.S. debt holdings, Federal Reserve Chair Janet Yellen said a default on U.S. debt would have “very severe” consequences economically.

Yellen made the remarks in the question-and-answer portion of her June 21 appearance before the Senate Banking, Housing and Urban Affairs Committee. While Yellen did not name Trump in her answer—nor did her questioner, Sen. Robert Menendez (D-N.J.)—she said it was clear the proposal at issue was Trump's May discussion of investors taking a “haircut” on U.S. debt holdings.

“I really don't know of anyone more qualified to answer this question than you,” Menendez said at the hearing. “In your opinion, what would be the consequences if the president of the United States were to propose that holders of U.S. Treasury bonds accept less than the face value of their investments?”

“I feel the consequences for the United States and the global economy of defaulting on Treasury debt would be very severe,” Yellen said. “U.S. Treasury securities are the safest and most liquid benchmark security in the global financial system. They play a critical role in financial markets, and the consequences of such a default, while they're uncertain, I think there could be no doubt that it would be long-run harmful to the U.S. interests and, at a minimum, result in much higher borrowing costs for American households and businesses.”

Yellen's comments are notable not only because she recently sidestepped a question on the potential impact of a Trump presidential race victory on financial markets, but also because Trump, if he did win, would have the power to nominate members to the Fed board and to renominate Yellen as chair in 2018. Typically, Fed chairs shy away from offering opinions that could be seen as overtly partisan, even as members of both parties often try to elicit answers that can be used in the political arena.

‘Nothing for You.'

Menendez prefaced his question by saying, “Recently, in the national public discourse, there are those who propose reducing the national debt by persuading creditors to take a haircut on their investments.”

In a May 5 CNBC interview, Trump said he didn't want to renegotiate U.S. bond terms. “I think you can do discounting. Depending on where interest rates are, I think you can buy back. I'm not talking about with a renegotiation, but you can buy back at discounts, you can do things with discounts,” he said.

Trump said May 9 he only meant debt could be bought back if it could be repurchased on terms favorable to the government, not that he favored forcing bondholders to take a loss or a debt default (See previous story, 06/03/16).

At a June 6 conference in Philadelphia, Yellen ducked a question on Trump. When asked if his victory might trigger an “economic crash,” Yellen answered, “I'm sorry. I've got nothing for you on that. You know, we're very focused on doing our jobs, and we'll see what happens.”

Yellen in her Senate Banking appearance did wade somewhat into the debate on federal entitlement programs and their long-term budget sustainability. Under questioning from Sen. Mike Rounds (R-S.D.), Yellen said the programs should be scrutinized and ways found to put them on a more sound financial footing.

“Well, they need to have Congress look at both revenues and the structure of expenditures to ensure that those programs remain sustainable and the overall federal budget and debt associated with that remain on a sustainable course. Because as you go out further with an aging population, as you said, the debt-to-GDP ratio is rising simply unsustainably and that does require changes,” Yellen said.

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com.

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com.

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