Interest(ing) February 19, 2014 at 10:43 pm

Do not charge your fellow man interest, whether on money or food or anything else that may earn interest.

This passage, and its paraphrase in Hamlet, comes to mind reading Bloomberg’s account of the IMF’s new thinking on sovereign loans. Perhaps one way to interpret the ancient text is as pointing out that debt – obligations that must be repaid on time – is inherently dangerous for both borrower and lender in that the former might not be able to pay promptly, and that can sometimes cause problems for the latter. Naively one might think that deferrable or bail-in’able instruments – like much bank debt these days – are better. Investors are compensated for deferral risk via the coupon, as well as plain default risk (which of course is now much lower as there would often be no need to default). Instead of railing against the IMF’s thinking, as Bloomberg does, perhaps they could consider the stability benefits if all sovereign debt was deferrable?

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