55 B.C. L. Rev. 1 (2014)

handle is hein.journals/bclr55 and id is 1 raw text is: 





  ROLLOVER RISK: IDEATING A U.S. DEBT

                                DEFAULT



                            STEVEN   L. SCHWARCZ*

   Abstract: This Article examines how  a U.S. debt default might occur, how it
   could be avoided, its potential consequences if not avoided, and how those con-
   sequences could be mitigated. The most realistic default would result from roll-
   over risk: the risk that the government will be temporarily unable to borrow suf-
   ficient funds to repay its maturing debt. The United States, like most govern-
   ments, routinely finances itself through short-term debt, which is less expensive
   than long-term debt. But this cost-saving does not come free of charge: it in-
   creases the threat of default. A U.S. debt default-even a mere technical de-
   fault such as temporarily missing an interest or principal payment-would have
   severe economic and systemic consequences  both domestically and worldwide.
   Such a default would also raise a host of legal issues, including questions of first
   impression under the Fourteenth Amendment  to the Constitution.

                                 INTRODUCTION

     Although   many   would   agree  that an eventual  default  [by the United
States government]   on [its] Treasury debt [is] a conceivable, although unlikely,
outcome,  concern  is growing.'  When   the U.S. Secretary  of the Treasury met
recently with a group  of Chinese  students, they laughed contemptuously at   the






    © 2014, Steven L. Schwarcz. All rights reserved.
    * Stanley A. Star Professor of Law & Business, Duke University School of Law, and Found-
ing Director, Duke Global Capital Markets Center; schwarcz@law.duke.edu. This Article expands
and develops the author's presentation at the University of Iowa College of Law April 13, 2013
conference, Fiscal Reform, Monetization, or Default: How Will the United States Solve the Prob-
lem of its National Debt? The author thanks participants in that conference and also Donald S.
Bernstein, Elisabeth de Fontenay, Deborah Lucas, Julie Maupin, Robert T. Miller, Charles W.
Mooney, Jr., and participants at a lecture at Stanford Law School for their valuable comments and
Paulina Stanfel and Joan Kerecz for excellent research assistance.
    1 Deborah Lucas, The Federal Debt: Assessing the Capacity to Pay, in Is U.S. GOVERNMENT
DEBT DIFFERENT? 101, 101 (Franklin Allen et al. eds., 2012) (arguing that current fiscal policy is
on an unsustainable trajectory); see Satyajit Das, The Main Event-The U.S. Debt Crisis, ECONO-
MONITOR  (Nov. 20, 2011), http://www.economonitor.com/blog/2011/11/the-main-event-the-u-s-
debt-crisis/, archived at http://perma.cc/0Zd5nPT3GwZ (noting that [n]on-American observers
view the debt ceiling debate with morbid fascination and increasing concern).


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