Thursday, August 28, 2014

Should the collection of very high risk premiums on sovereign debt be allowed to go hand in hand with the collection of 100% of the principal?

I have not discussed this with anyone but myself… so I do not hold myself too much to this my own opinion… and so it can change. 

I am and have always been concerned with sovereign over indebtedness, as that affects foremost the citizens of the over-indebted country's own possibilities to take on debt… to realize their own dreams and not the politicians’ dreams... and so I have been toying around with many ideas. Among these:

If a lender gives a sovereign a loan at an interest rate that exceeds for instance 3% what the "safest" sovereign has to pay for a loan, “the overcompensation”, then, if the sovereign runs into trouble, and declares default, should it not immediately be able to apply all overcompensation to the capital owed?

Why? Because frankly I feel that the lender to a sovereign should not be able to eat his cake and have it too. If he charges a sovereign higher interest rates because of its riskiness, well then he should not be able to expect to fully collect 100% of the principal.

Does this make some sense?