July 11 The first and only time the United
States suffered a technical default 32 years ago was blamed on
check-processing glitches and quickly corrected -- but did that
matter to markets?
At the time, the Congress and the Carter administration
were locked in a debt limit battle, that time to raise the U.S.
borrowing cap to $830 billion -- compared to the now-exhausted
$14.3 trillion limit.
Following are details of the 1979 incidents and their
The U.S. Treasury was forced to delay payments to
individual investors redeeming about $122 million of Treasury
bills maturing on April 26, May 3 and May 10, 1979. The
Treasury blamed the delay on an unprecedented volume of
participation by small investors and the unanticipated failure
of word-processing equipment used to prepare schedules needed
to cut them individual paper checks.
The problem was cleared up within three weeks, and
investors holding T-bills maturing on May 17, 1979, were paid
Yields on Treasury bills shot up by about 60 basis points,
or 0.6 percent. A scholarly paper on the accidental defaults
published a decade later argued the damage was permanent.
"This increase was a one-time, permanent ratchet upward
of yields," wrote Terry Zivney, a finance professor at Ball
State University and Richard Marcus, a finance professor at the
University of Wisconsin-Milwaukee, in their 1989 paper titled,
"The Day the United States Defaulted on Treasury Bills."
The delayed payments occurred as U.S. interest rates were
soaring higher ahead of the Federal Reserve's massive
tightening of monetary policy under Paul Volcker, who took over
as the central bank's chairman later that year.
Prevailing 13-week bill yields in May 1979 were 9.68
percent -- a reason why so many individual investors parked
money in "risk-free" T-Bills.
On Monday, however, bill yields were just 0.02 percent,
indicating that much had changed since the 1989 analysis.
"What is clear from the data is that the default in early
1979 did appear to be part of the 'cause' of the
well-publicized increase in interest rate levels suffered in
the first half of the 1980s," wrote Zivney and Marcus.
"Perhaps too much blame for the higher interest rates has
been leveled at the Federal Reserve for a change in monetary
policy, where a portion of the blame should be assigned to
The U.S. Treasury does not view the 1979 incidents as a
true default. A Treasury official said it was a technical
bookkeeping glitch that was rectified quickly and affected only
a tiny percentage of maturing securities at the time.
It is a far cry from the default that would occur should
the Congress fail to raise the debt limit before Aug. 2, when
the Treasury has said it will no longer be able to pay all of
the country's bills.
U.S. Treasury Secretary Timothy Geithner has argued that a
default would spike Treasury yields sharply higher, choking off
recovery and causing panic in world financial markets.
(Reporting by David Lawder)