This is a follow up to a previous question I had here Fed Authority

I understand that once the government goes into default it triggers a number of different legal steps and procedures, such as CDS and Repo agreement ramifications - this second link also talks about the distinction between a 'technical' default and 'actual' default.

My question: If the Treasury chose to pay some debt holders and not others, would the ones who got paid have any legal recourse due to the government actually being in default to some of its debtors?

Or put another way: If the Federal Reserve was the only one who didn't get paid, what would be the legal consequences? It seems the ones who got paid wouldn't have Standing

I realize bonds/rates/etc...could (would?) go up and be affected, but I'm specifically asking if any legal action could be taken (other than by the Fed in my example).

  • A CDS or Repo Agreement is usually concerning a bond issued by a private issuer, not a sovereign issuer for which default risk is minimal. These are discussed in connection with potential default on a federal debt because that would impact the bond market and in turn would have a huge impact on the value of privately issued bonds.
    – ohwilleke
    Commented Mar 22, 2018 at 0:51

2 Answers 2


If the Treasury chose to pay some debt holders and not others, would the ones who got paid have any legal recourse due to the government actually being in default to some of its debtors?


In order to sue in the federal courts (which would have exclusive jurisdiction over a lawsuit related to unpaid Treasury bonds), you must have standing to sue arising from an actual injury to the person bringing suit. A debt holder who got paid as agreed would have no legal injury and hence no standing to sue. Standing is a jurisdictional and constitutional bar to bringing a lawsuit.

Somebody might have standing to sue, but not a debt holder who was paid as agreed and whose bonds were not in default, unless a debt holder had a bond that was not yet due to be paid and the federal government officially repudiated its obligation to pay the bond (which would be an anticipatory breach).

  • You don't think the constitutionality of Federal Government's authority to repudiate could be challenged based on section 4 of the 14th Amendment (as Geithner suggested)?
    – grovkin
    Commented Apr 20, 2018 at 21:37
  • @grovkin You are entirely missing the point. Someone with standing surely could challenge the constitutionality of a repudiation. But, only someone who is injured by the action has standing to sue. If you aren't harmed you can't sue.
    – ohwilleke
    Commented Apr 20, 2018 at 22:12
  • Hmm. You are right. I did misread it. Having said that, the credit rating of the bonds would suffer. This would result in direct losses, even of the bond holders who have been paid. I don't think the fiduciary responsibility to Treasury bondholders has ever been proposed as a legal theory though. It probably would not make sense because all US debts have the same seniority. However, direct marketplace losses may give bondholders standing.
    – grovkin
    Commented Apr 20, 2018 at 23:21
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    @grovkin If everything that the federal government did that had an impact on market prices was actionable, it would be sued daily. Hence, one of the reasons for the requirement of an impairment of an actual legal right, e.g., under a contract, to have standing.
    – ohwilleke
    Commented Apr 21, 2018 at 0:25
  • Most of what the government does is covered by sovereign immunity. If Geithner's reading of the 14th is correct, then a default is not legal. So the government does not have a sovereign immunity to actions seeking relief resulting from a default. So any legal injury which results from it is as recoverable as it would be from a non-government entity. And bond holder do have a fiduciary prerogative. So they can (at least in theory) seek relief for marketplace losses if issuers take actions which foresee-ably cause these losses. Fiduciary prerogative gives standing.
    – grovkin
    Commented Apr 21, 2018 at 8:15

It is illegal/unconstitutional for the treasury to not pay debts first. The Government currently gets enough revenue to service the debt it is required to pay. The government can not actually default, and it doesn't have to rely on weird tricks to do it. There is a fairly major caveat to this scenario in that the treasury claims it lacks the capability to prioritize payments with its current systems. This could cause a default/delay in payment similar to the one that already happened in 1979, how markets would be hard to predict.

The problem is paying for all the other welfare programs, salaries, and other contracts. one possible budget is laid out here. Default can't really happen, but the fallout from the forced massive spending cuts elsewhere could cause all sorts of problems and ruin the economy anyway, but it wouldn't be a default.

If the federal government did actually default there isn't anything internal creditors could do, other than hope the government pays them back eventually. Foreign entities would have the option to extract debts by force. Sovereign nations don't really have rules they have to follow unless another nation wants to make them, international law doesn't have any higher power to enforce it apart from unions of other nations.

  • 3
    I can only guess you didn't actually read my question. This answer lacks cohesion and relevance.
    – jsb1109
    Commented Oct 9, 2013 at 19:48
  • 1
    Which bit of the page you linked to says it is unconstitutional to not pay debts? If default can't actually happen, why is everyone worrying about it? Clearly a very large number of people disagree with this. Commented Oct 10, 2013 at 2:22
  • 2
    @DJClayworth "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." amendment XIV section 4. people worry about the default because its a better headline than "President must choose to pay food stamps or social security or veterans benefits."
    – Ryathal
    Commented Oct 10, 2013 at 12:19
  • 2
    Actually the amendment you link only means that the government can not just declare its debt void. It does not force them to pay them on time. Commented Oct 10, 2013 at 14:12
  • @Ryathal On one side we have your personal interpretation of the Constitution. On the other we have a whole pile of politicians, analysts, reporters and lawyers who say there will be a default. Commented Oct 10, 2013 at 14:23

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