Monday, February 6, 2012

Islamic Patriot Bonds: Another Band-Aid Solution

The Pound is sinking
After maxing out on internal borrowings that are crowding out domestic lending capacity and issuing sovereign bonds at junk rate yields, the economic brain-trust has come up with another novel solution:  trying to sucker Egyptians living abroad into lending them money at below market rates.  While appealing to patriotism and religion (they will be “Islamic” bonds; i.e., effectively exactly the same as non-Islamic bonds, only the interest coupons are instead deemed as rental payments), the missing feature is the fact that Egyptians – whether within Egypt or residing abroad – are not suckers.  They, like any other investors, will conduct due diligence and invest where returns are in line with what the market dictates.

There is a much more direct and sustainable solution to addressing the country’s funding needs, and that is to accept the International Monetary Fund's standby loan facility.  The continuing efforts to avoid the IMF option are a function of the dangerous alignment of populists with no understanding of global finance, and statist bureaucrats seeking to protect their control over the country’s levers of governance. 
The naiveté, whether genuine or calculated, must stop.  There are no shortcuts to economic reform. 

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