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When the US defaulted last

world Updated: Jul 30, 2011 23:37 IST

There was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the debt stalemate on Capitol Hill continues.

Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion - today's ceiling is $14.3 trillion - only after treasury secretary W Michael Blumenthal warned the US was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

"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, Ball State University professor who wrote a paper, "The Day the United States Defaulted on Treasury Bills."

The incident was a minor blip. The Treasury had missed payments on a tiny $120 million worth of bill. Investors were paid in full with back interest. T-bills continued to be considered a safe investment.

Treasury officials then and now argue the event was not even a default, but merely a delay caused by the internal logjam.

And yet, even that brief failure to meet some obligations had expensive consequences.

One study concluded "that the series of defaults resulted in a permanent increase in interest rates" of more than half a percent, which over time translated into billions of dollars in increased interest payments on the nation's debt, a cost shouldered by taxpayers.

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