Friday, 5 December 2008

Debtor nation

Casting an eye over the Atlantic I see that chipmaker Freescale Semiconductor intends not to make a payment on part of its debt next year, and will instead take out more debt. (This is what Payment in Kind (PIK) loans do - you can opt to make an interest payment by taking out more debt.)

This is all above board – no-one is doing anything wrong. In fact, not paying debt is the new taking out debt. Everyone's doing it. No less an institution than the UK government is putting together a scheme where those with the most debt can opt not pay debt for a couple of years so as to get into shape to take out some more debt.

Nils Pratley in the Guardian says that this government scheme to bailout mortgage holders looks like it fails the moral hazard test – ie it encourages bad behaviour.

But which politician cares? The country's rulers are running scared of debt-laden householders. Like weak-willed parents confronted with a very determined and stroppy child, they will make almost any decision, however wrong, just to achieve the quiet life.

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