FOCUS: ‘King of Debt’ Donald Trump Says He Knows How the U.S. Might Get Out of Paying It All​ Back

(The Washington Post) -

Presumptive Republican presidential nominee Donald Trump on Thursday said he might seek to pay back investors in U.S. government debt less than they were owed “if the economy crashed,” raising doubts about whether Treasury bonds would be reliable in a future administration.

The comments were striking because, historically, U.S. government debt has been treated as sacrosanct, the safest investment in the world, and a pillar of global financial stability.

Speaking on CNBC, Trump said he embraces the idea of taking on debt, given that borrowers can try to tweak the terms later on. Indeed, as a businessman Trump has used the bankruptcy laws on several occasions to reduce his companies’ debts.

“I am the king of debt. I do love debt. I love debt. I love playing with it.” Trump said.

“Do you believe that we, in terms of the United States, need to pay a hundred cents on the dollar, or do you think that there’s actually ways that we can renegotiate that debt?” CNBC’s Andrew Ross Sorkin asked him.

“Yeah, I think – look, I have borrowed, knowing that you can pay back with discounts. And I have done very well,” Trump said. “I would borrow, knowing that if the economy crashed, you could make a deal, and if the economy was good, it was good, so, therefore, you can’t.”

Banks, investors and ordinary people around the world rely on bonds issued by the Treasury Department as more dependable than cash. Doubts about whether the debt is trustworthy could influence interest rates throughout the economy, which are connected to Treasury rates. For example, home loans and credit cards could get more expensive as banks become concerned about whether their Treasury bonds will be made good.

While Trump’s precise plans were unclear from the interview, if the U.S. government did not pay some of its debts in full, creditors would come to see the country as an unreliable borrower, said Douglas Holtz-Eakin, an economist who heads the conservative American Action Forum think tank.

“You’re Puerto Rico,” he said, referring to the fact that the U.S. territory is on the verge of defaulting on its debt. “That’s not a good thing.”

“The Treasury Department could go to people who hold the debt and say, look, we’re not going to be able to pay you back,” said Michael Strain, an economist at the right-leaning American Enterprise Institute. “That would be an outrageous thing to do. … It could introduce chaos.”

Pressed further on his comments on CNBC, Trump acknowledged that the situation he would face as president would be different than that of a commercial real-estate developer, making ambiguous statements about how far he’d go to revise the terms of U.S. government bonds.

“We’re in a different situation with the country,” he said. “Now you are talking about, you know, you’re talking about something that’s very, very fragile, and it has to be handled very, very carefully.”

“But let’s be clear. I mean, you’re not talking about renegotiating sovereign bonds that the U.S. has already issued?” CNBC’s Becky Quick asked him.

“No. I don’t want to renegotiate the bonds,” Trump said. “But I think you can do discounting, I think, you know, depending on where interest rates are, I think you can buy back, you can, I’m not talking about with a renegotiation, but you can buy back at discounts.”

Trump seemed to be saying that the government could repurchase debt that was issued previously at costly interest rates, borrowing the money to do so at today’s inexpensive interest rates.

“I think there are times for us to refinance,” he said. “I could see long-term renegotiations, where we borrow long-term at very low rates.”

It is unclear whether such a strategy would meaningfully improve the government’s financial position. Since the government operates at a deficit, the Treasury would have to borrow even more money on a monthly basis to make the purchases and might have to offer investors more expensive interest rates on new debt anyway.

U.S. government debt has remained crucial to the global financial system over the past few years, especially as the global economy has weakened. Still, doubts have arisen before, particularly when Republican congressional leaders threatened not to raise the federal limit on borrowing without policy concessions from the Obama administration in 2011. Ultimately, the cap was raised, though not before the Standard & Poor’s rating agency reduced the rating of the debt from the firm’s highest grade.