Delayed payments show default consequences

WASHINGTON, July 11 (UPI) -- Researchers say the United States, which faces an Aug. 2 deadline before defaulting on loans, actually defaulted before -- in 1979. Or was it really a default?

Their research provides a look at some of the problems and costs that could arise if the present-day stalemate over raising the debt ceiling isn't resolved, The Washington Post reported Sunday.

In 1979, a last-minute approval to raise the debt limit to $830 billion -- compared with today's $14.3 trillion -- came after Treasury Secretary W. Michael Blumenthal (under President Jimmy Carter) warned the country was near its first default. The 11th-hour approval, coupled with investor demand for treasury bills and technical glitches in processing paperwork, resulted in thousands of late payments to holders of treasury bills that matured in April and May, the Post said.

"You hear lot of people say, 'The government never defaulted.' The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened," said Terry Zivney, a finance professor at Ball State University who co-authored "The Day the United States Defaulted on Treasury Bills."

Investors, some of whom sued the government to recover damages, were eventually paid in full with back interest, the newspaper said.

Treasury Department officials then and now said the event was not a default but a delay caused by the internal glitches.

The study by Zivney and Dick Marcus found that even a brief interruption in paying obligations has consequences, the Post said. It said the "series of defaults resulted in a permanent increase in interest rates" of more than half a percent that translated into billions of dollars in increased interest payments on the nation's debt over time.

"The impact is smaller at first because only new debt is affected," they wrote. "But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized."