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On the Role and E ects of IMF Seniority

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  • Diego Saravia

Abstract

The paper presents a three period model that studies the e ects of IMF loans on borrowers’ and lenders’ welfare highlighting the fact that the IMF has both de jure and de facto seniority rights over private creditors. It is shown that an IMF intervention affects borrowers and lenders in different ways. Ex-post, once capital is installed and a liquidity shock occurs, an IMF intervention always makes the borrower country better off. The e ects on non-senior lenders depend on the size of the senior intervention and on the country’s solvency situation. IMF intervention makes existing creditors worse off when the country’s solvency situation is either very good or weak, but makes them better off when solvency is in an intermediate range, consistent with the nonlinearities found empirically in Mody and Saravia (2003). The possibility of future senior intervention a ects the optimal level of investment ex-ante, and it may be the case that the borrower country would be better off by committing today not to borrow from the IMF in the future. Since a country has incentives to borrow from the IMF once the shock occurs, this promise is not time consistent and an institution with clear rules about when to intervene will be welfare improving

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 131.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:131

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Keywords: Seniority; IMF; ex-ante; ex-post; welfare e ects.;

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References

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  1. Detragiache, Enrica, 1994. "Sensible buybacks of sovereign debt," Journal of Development Economics, Elsevier, vol. 43(2), pages 317-333, April.
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  11. Roubini, Nouriel & Brad Setser, 2004. "Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 378.
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  14. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  15. Berkovitch, Elazar & Kim, E Han, 1990. " Financial Contracting and Leverage Induced Over- and Under-Investment Incentives," Journal of Finance, American Finance Association, vol. 45(3), pages 765-94, July.
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  17. Barry Eichengreen, 2003. "Restructuring Sovereign Debt," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 75-98, Fall.
  18. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows," IMF Working Papers 03/100, International Monetary Fund.
  19. Charles W. Calomiris, 1998. "The IMF's Imprudent Role As Lender of Last Resort," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), pages 275-294, Winter.
  20. Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, number 9780199257447.
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Cited by:
  1. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.
  2. Diego Saravia, 2010. "Vulnerability, Crisis and Debt Maturity: do IMF Interventions Shorten the Length of Borrowing?," Working Papers Central Bank of Chile 600, Central Bank of Chile.
  3. Ran Bi, 2006. "Debt Dilution and Maturity Structure of Sovereign Bonds," 2006 Meeting Papers 652, Society for Economic Dynamics.
  4. Leonardo Martinez & Cesar Sosa Padilla & Juan Hatchondo, 2012. "Debt dilution and sovereign default risk," 2012 Meeting Papers 974, Society for Economic Dynamics.
  5. Jorra, Markus, 2012. "The effect of IMF lending on the probability of sovereign debt crises," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 709-725.
  6. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," CESifo Working Paper Series 3944, CESifo Group Munich.
  7. Gonçalves, Carlos Eduardo & Guimarães, Bernardo, 2012. "Sovereign default risk and commitment for fiscal adjustment," CEPR Discussion Papers 9163, C.E.P.R. Discussion Papers.
  8. Chamley, Christophe & Pinto, Brian, 2012. "Sovereign bailouts and senior loans," Policy Research Working Paper Series 6181, The World Bank.
  9. Satyajit Chatterjee & Burcu Eyigungor, 2013. "Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt," 2013 Meeting Papers 654, Society for Economic Dynamics.
  10. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
  11. Christophe Chamley & Brian Pinto, 2012. "Sovereign Bailouts and Senior Loans," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 269-291 National Bureau of Economic Research, Inc.

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