Sunday, June 11, 2017

The cost of debt and the cost of credit are two different things

The title grabbed me immediately: Capital Controls and the Cost of Debt.

Not capital controls. It's the cost of debt that caught my eye. I still don't know what "capital controls" are. I still don't even know what "capital" is. But the cost of debt, yeah, that one I know. So I clicked the link (it's the loader page for a PDF) and read the first sentence of the abstract:

Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads.

I see now how difficult that sentence is to read. Too long. On the first read, the last three words stuck in my head: "corporate bond spreads."

Interest rates. Spreads are interest rates, differences in interest rates. That's not the cost of debt.

Interest rates are the cost of credit, the cost of borrowing. The cost of debt is something entirely different. The cost of debt is the cost of the whole accumulation of borrowings. And the size of that cost depends primarily on the size of the accumulation. Not on interest rates.

Interest rates affect the cost of the next dollar borrowed. That's entirely different.

For example:

These days, the cost of debt is high and the cost of credit is low. That much, I know.

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