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The effect of IMF lending on the probability of sovereign debt crises

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  • Jorra, Markus

Abstract

This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We find that IMF programs significantly increase the probability of subsequent sovereign defaults by approximately 1.5–2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by specifications that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to fiscal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the effects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 4 ()
Pages: 709-725

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:709-725

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: IMF programs; Sovereign defaults; Bivariate probit; International financial architecture;

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Cited by:
  1. Schaltegger, Christoph & Weder, Martin, 2013. "Fiscal Adjustments and the Probability of Sovereign Default," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79979, Verein für Socialpolitik / German Economic Association.
  2. Eichler, Stefan & Hofmann, Michael, 2013. "Sovereign default risk and decentralization: Evidence for emerging markets," European Journal of Political Economy, Elsevier, vol. 32(C), pages 113-134.
  3. Gurgen OHANYAN, 2013. "The Sway of IMF Policies on the Romanian Economy amid Global Financial Crisis," REVISTA ADMINISTRATIE SI MANAGEMENT PUBLIC, Faculty of Administration and Public Management, Academy of Economic Studies, Bucharest, Romania, vol. 2013(21), pages 27-42, December.
  4. Luca Papi Author-Name-First Luca & Andrea F. Presbitero & Alberto Zazzaro, 2013. "IMF Lending and Banking Crises," Working Papers CASMEF 1304, Dipartimento di Economia e Finanza, LUISS Guido Carli.

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