The Argentinian Option In America's Future

It's easy for commentators and polemicists to use the word "bankruptcy" in the context of sovereign debt obligations.  I've done it myself in my lazier moments.  A more appropriate description for what happens when governments can't pay their bondholders would be "default," not bankruptcy.  Given the U.S. government's massive unfunded liabilities, bond investors must consider a default on Treasuries as a possibility.

How would a U.S. default affect bondholders?  Argentina shows us one case:

Argentine bonds and stocks rose on Monday and the country risk narrowed to its tightest since July 2008 on expectations for a high rate of acceptance in a planned swap of up to $20 billion in defaulted bonds.

Locally traded bonds closed up 1 percent on average as investors continued to buy sovereign debt in the run-up to the exchange, which is set to launch on April 14

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The initial announcement of default always roils the bond market, driving up interest rates and crowding out private borrowers as investors shun all kinds of debt.  Greece is still in the early stages of its default, which I believe will proceed apace regardless of what the EU's leaders say they will do.  The U.S. has yet to begin its sovereign default drama, although the curtain will go up on the opening act once Social Security starts to have trouble covering its payments. 

Defaults hurt in the short term.  Argentina shows us that there is life after default, with investors ready to exchange devalued bonds and participate in issues from a newly creditworthy government.

I believe that U.S. Treasuries with maturities longer than one year pose a default risk, so I'm not buying them.