In March 2024, Argentina was faced with a large stock of maturing debt and inadequate funds. Paying the maturing debt would have required either borrowing from a skeptical market or printing pesos and thus spurring an already sky-high inflation rate.
Given these unattractive options, the Argentine government instead chose to do a “mega debt swap” or ‘megacanje’, in which holders of a large portion of Argentina’s 2024 maturing debt, totaling about $65 billion, were persuaded to exchange their debt for instruments maturing in later years. Now, trying to engineer such a maneuver in the almost $29 trillion U.S. Treasury market may seem far-fetched. But in fact, a version of a unilateral debt swap is already in U.S. Council of Economic Advisers Chair Stephen Miran’s playbook on restructuring global trade.
He posits that the enormous U.S. debt burden could be reduced by incentivizing U.S. allies to swap their short-dated coupon-paying Treasuries for century bonds, debt with payments a hundred years into the future.
The means of persuasion? Mostly, the threat of tariffs. Call it the ‘Mega MAGA swap’. Is the foregoing something to take seriously? Miran recently said that the playbook was just a set of ideas from before he assumed his current official role and that the President would decide, not him. Plus, the current U.S. administration already seems skittish about angering the bond market. Indeed, a sharp rise in U.S. bond yields appears to have been partly responsible for President Trump backpedaling his “liberation day” reciprocal tariffs.
Yet the turmoil created by the administration’s unorthodox policies, if it persists, could potentially make the idea of an unconventional debt swap seem less ludicrous.
SAFE HAVEN?
The spike in U.S. Treasury yields that preceded Trump’s tariff U-turn likely had many causes. But the combination of rising bond yields, a weakening dollar and plummeting U.S. equities made many suspect that some foreign holders were seeking to reduce their exposure to the U.S. overall, shifting to seemingly “safer” assets.
Indeed, price movements suggest that the tariff turmoil spurred inflows into German bunds and gold.
This episode has thus raised concerns about the status of U.S. Treasuries as the world’s dominant safe asset. Losing that status could cause all sorts of bad stuff to happen, including an increase in the cost of U.S. borrowing, making it more difficult for the country to refinance its over $36 trillion in debt.
The U.S. would almost certainly be able to pay any higher costs or engage in some belt-tightening. But markets could panic.
And unless the administration wanted to reverse much of its economic agenda, such panic could, ironically, make the administration consider more unconventional policy ideas, like a Mega MAGA debt swap.
PLAN B
First, could a unilateral debt swap be done?
Here is the key bit: U.S. sovereign debt has little in the way of contract terms. Specifically, there are no contract provisions setting forth the conditions under which maturities can be extended.
U.S. Treasury Secretary Scott Bessent could take the position that this ‘silence’ means he can unilaterally extend maturities. Most Treasury holders, of course, would undoubtedly take the position that this silence means the opposite: any change to maturities would require approval from every Treasury holder impacted.
So, what might Bessent do? U.S. Treasuries would obviously be governed by U.S. law, so the U.S. would have “local law advantage”, meaning Bessent could eliminate this contractual silence by simply asking Congress to pass a law authorizing a maturity extension.
This kind of thing has happened, albeit in a more ‘EM-ish’ context.
In 2012, Greece had a debt stock that was roughly 90% governed by local law, with no provisions stipulating how the terms could be modified. The Greek legislature thus retrofitted a provision to the bonds that enabled the country to alter the bond terms if it received approval from a super majority of holders. A big portion of those creditors were European public institutions that wanted to see Greece clean up its debt problem.
The end result? Greece got approval. Creditors sued, but the country ultimately got a giant reduction in its debt obligations.
Another version of this movie has been seen before – in the United States. In 1933, during the Great Depression, the United States used legislation to abrogate the contractual right of holders of government bonds to be paid in gold. In 1935, the “gold clause cases” went before the Supreme Court where the Court upheld the abrogation.
This time around, even if the Supreme Court ruled that a debt swap was not a legal default, credit ratings agencies would almost certainly consider it a distressed debt exchange. And that would be the end of U.S. Treasuries’ safe haven status.
Is all this highly unlikely? Yes. But given how many supposedly unthinkable things have happened in the past three months, it is wise not to discount even extreme scenarios.
The author is a law professor at the University of Virginia.
