Recent paradox in Ireland: rates are going down on Irish bonds because Ireland is getting a better rate from their bailout borrowings. The better rate means they spend less on interest payments, which decreases the chances of default. But the rate is itself used as a measure of the risk of default! So there is a feedback loop: high rates mean higher risk of default, and high risk of default justify higher rates.

That particular objection seems easily answered by debtor's prison combined with forced labor. Hell, people could be let out for 8 hours a day to go to their old jobs. The important part is that the privilege of spending money on anything but the most basic of needs is revoked.

(Not that I support debtor's prisons or anything, there're just a few ways in which they could obviously be done more intelligently).

Remember, debtors prisons in our own culture predate things like central credit reporting bureaus and garnisheeing laws. Without these things, what's the disincentive to not pay back your loans?

The threat of prison is supposed to make people more likely to pay back their debts.

And not take on too much debt to begin with.