A closer look at Donald Trump's comments about refinancing U.S. debt
During a pair of recent interviews, presumptive Republican nominee Donald Trump made waves by suggesting that he might try to refinance the U.S. federal debt.
The comments prompted both confusion about what Trump was actually proposing and alarm at what might happen if he actually followed through on his idea.
Given the concerns about his remarks, we decided to check with a range of experts on government debt. We wanted to see if they could, first, explain and, second, critique what Trump had said in the interviews. Here’s what we found. (Trump’s campaign did not respond to an inquiry for this story.)
Recapping what Trump said
Trump’s initial remarks came in an interview with CNBC’s Andrew Ross Sorkin and Becky Quick on May 5, 2016.
Sorkin: "Mr. Trump, you talk about debt. And you are to some degree the king of debt. I appreciate that point. You have also renegotiated debt agreements over the years. 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?"
Trump: "Yeah, I think -- look. I have borrowed, knowing that you can pay back with discounts. And I have done very well with debt. Now, of course, I was swashbuckling, and it did well for me and it was good for me and all that. And you know, debt was sort of always interesting to me. Now we're in a different situation with the country. But 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 lose. It's like, you know, you make a deal before you go into a poker game, and your odds are so much better." ...
Quick: "I understand that you've done this in business deals, but are you suggesting we would negotiate with the U.S. credit in such a way?"
Trump: "No, I think this. I think there are times for us to refinance. We refinance debt with longer term. Because you know, we owe so much money. … I could see long-term renegotiations, where we borrow long-term at very low rates." ...
Quick: "But let's be clear. I mean, you're not talking about renegotiating sovereign bonds that the U.S. has already issued?"
Trump: "No. I don't want to renegotiate the bonds. 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, you can do things with discounts. … I would refinance debt. I think we should refinance longer-term debt."
The second comments came in an interview with the Wall Street Journal, on May 10, 2016.
Trump: "I’m only saying you can buy back. Look, this isn’t a real estate deal where you can go in and buy out a mortgage at a big discount because the market crashes, okay? This is the United States government. The bonds are absolutely sacred. … I’m saying if interest rates go up, you can buy debt at a discount on the market — just on the market. You just buy back debt on — at a discount."
Wall Street Journal: "And so the U.S. government should spend its money to go buy back its bonds and --"
Trump: "Well, if they can make good deals. If they can buy the debt back at good deals, you could buy it back in the market. And if rates go up, you’ll always — you’re always given that opportunity. But no, I’m not talking about negotiating with — with people that own the debt or creditors or anything like that."
Are Trump’s explanations coherent?
For starters, experts gave Trump -- who has experience with corporate debt but not government debt -- poor marks for articulating his case.
"Neither interview makes sense," said Neil Buchanan, a George Washington University law professor and author of The Debt Ceiling Disasters.
"The statements are neither clear nor coherent," agreed Paolo Mauro, a senior fellow at the Peterson Institute for International Economics and a visiting professor at Johns Hopkins University Carey Business School.
Charles W. Mooney Jr., a law professor at the University of Pennsylvania, said Trump "seems to confound concepts of ‘discount,’ ‘refinance,’ and ‘renegotiate’ just as he does with every other concept he has ever addressed."
And Brad W. Setser, a senior fellow at the Council of Foreign Relations and the deputy assistant secretary for international economic analysis at the U.S. Treasury from 2011 to 2015, called Trump’s comments "lots of very loose talk on a subject where there shouldn't be loose talk."
Once they had studied the transcript, most of the experts we contacted said their impression was that he was ruling out "renegotiation" but opening the door to "refinancing."
Confused yet? We were. Let’s discuss renegotiation first.
Renegotiation (sometimes called "restructuring") would occur if a country had already defaulted on its debts, or was about to default, and then negotiated with its creditors so they would accept a percentage of the amount they were owed, rather than the full amount.
Going this route would be considered a disaster for the U.S. economy, and ultimately for the international economy that depends on a strong United States.
For one thing, no one wants the United States to get into an economic situation desperate enough to require renegotiation.
Then there’s the reality that U.S. securities have long been considered default-proof. The bedrock assumption has allowed the United States to borrow at lower interest rates, which in turn carries an economic benefit. Making U.S. securities more risky would result in higher interest rates for most other types of borrowing, harming the national economy.
Finally, the current system has secured the United States’ position as the world’s safest harbor for global money. Renegotiating would blow all that up.
"Selling bonds at par and then talking them down or taking actions that would reduce their value so you can buy them back at a discount isn't good for investor confidence," Setser said. "Bond investors buy treasuries because they retain their value in bad times, and because they usually can be sold for close to par in the market, because they are safe. Treasuries aren't distressed bonds of a casino."
In fact, even accidental payment problems and the mere hint of a possible future default has cost U.S. taxpayers dearly in the past. As the New York Times has noted, "bookkeeping problems" in 1979 temporarily delayed interest payments, and the resulting increase in interest rates were estimated to have cost taxpayers $12 billion. Similarly, a debt-limit standoff between Democrats and Republicans in 2011 were estimated to have cost $19 billion.
So, despite some confusion over Trump’s wording, our experts concluded that he was ruling out a renegotiation scenario by telling the Journal that "bonds are absolutely sacred."
So what about Trump’s suggestion that the U.S. could do "discounting" instead?
Experts interpreted this to mean what’s more commonly known as "refinancing" -- a more voluntary, consensual process.
" ‘Refinancing’ is a term usually associated with taking advantage of low-interest rates to pay off older high-interest debt and finance it with new lower-interest debt," said Linda M. Hooks, an economist at Washington and Lee University. This is akin to what a homeowner might do with their mortgage after interest rates fall, she said.
Experts agreed that refinancing U.S. obligations, were it possible, would not be as harmful a course as renegotiating would be. Considering it also wouldn’t be unprecedented: Hooks noted that the Treasury considered it in the 1990s, and many countries will occasionally buy back their own debt as part of a "debt management operation" to avoid technical problems, such as too many payments coming due at the same time, Mauro said.
But the objective of a debt management operation "is not to gain a financial advantage," meaning this is "clearly not the case that Mr. Trump was thinking of," Mauro said.
Would refinancing work?
So it would be possible to refinance the United States’ debt. But just because it can be done doesn’t mean it would work to the government’s benefit, experts said.
The government would probably have to issue new bonds in order to have the cash to buy back old bonds.
"If interest rates go up and bond prices go down, you buy bonds at a low price -- but in order to finance the bond repurchase operation you have to issue new bonds at a higher market interest rate," Mauro said. "That exactly offsets the gain on the lower bond price."
In other words, the money saved by selling the old bonds would be eaten up by the government’s higher borrowing costs from the new bonds.
For refinancing to produce debt relief, you either retire high-interest debt and replace it with low-interest debt, or buy back debt that trades at a deep discount because creditors have lost confidence in the country. If you can buy $100 worth of bonds for $50 and rip them up, you get $50 in debt reduction.
But U.S. government now pays close to zero interest on its debt, which is not trading at a discount. Today and in the foreseeable future, "our debt is not trading at a deep discount," said Anna Gelpern, a Georgetown University law professor and nonresident senior fellow at the Peterson Institute. "You need to make it tank. But how? And more importantly, why?"
Even if the government somehow managed to make the interest rates work in its favor, "it is difficult to see how it would be a big enough win to materially impact the U.S. burden of debt service," Mooney said. "While there might be room for some arbitrage that would be beneficial at the margin for the U.S., this would not have any major impact on the government’s costs of funding" a debt load in the trillions of dollars.
All in all, the strategy doesn’t make much sense, said John A. E. Pottow, a University of Michigan law professor.
"The question is how he thinks he would get a better deal -- maybe through outsmarting the market on its mistaken predictions on interest rates?" Pottow said. "That is not lying, just bravado or egomania."
And it’s not like no one has brainstormed these ideas before, Mooney said.