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On the Role and Effects of IMF Seniority

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  • Diego Saravia

    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

We analyze the IMF as a lender to countries in financial distress highlighting the fact that it is a senior creditor. An advantage of delegating senior lending in a single institution rather than on competitive markets is that it would be able to reach the socially optimal solution. This would require the IMF not to intervene when the crisis is severe enough. However, a commitment device might be needed to achieve the socially optimal solution. If IMF lending were done for all shocks, the country would be always ex-post better off but lenders would be worse off when the country situation is either good or weak, which is consistent with empirical evidence. Anticipation of senior lending might make the country better off by preventing inefficient liquidation. However it might actually hurt the country ex-ante and too much rescuing in the future could lead to too little lending in the present which is contrary to the moral hazard critique.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 317.

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Date of creation: 2007
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Handle: RePEc:ioe:doctra:317

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Keywords: Seniority; sovereign debt; IMF; ex-ante; ex-post; welfare effects;

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References

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  1. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  2. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  3. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  4. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-85, June.
  5. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
  6. Barry Eichengreen, 2003. "Restructuring Sovereign Debt," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 75-98, Fall.
  7. 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.
  8. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
  9. Patrick Bolton & Olivier Jeanne, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," NBER Working Papers 11071, National Bureau of Economic Research, Inc.
  10. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
  11. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  12. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows," IMF Working Papers 03/100, International Monetary Fund.
  13. Detragiache, Enrica, 1994. "Sensible buybacks of sovereign debt," Journal of Development Economics, Elsevier, vol. 43(2), pages 317-333, April.
  14. 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.
  15. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  16. Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, number 9780199257447, September.
  17. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  18. Dani Rodrik, 1995. "Why is there Multilateral Lending?," NBER Working Papers 5160, National Bureau of Economic Research, Inc.
  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. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
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Citations

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Cited by:
  1. Diego Saravia, 2013. "Vulnerability, Crisis and Debt Maturity: Do IMF Interventions Shorten the Length of Borrowing?," Working Papers Central Bank of Chile 697, Central Bank of Chile.
  2. Carlos Eduardo Gonçalves & Bernardo Guimarães, 2012. "Sovereign default risk and commitment for fiscal adjustment," Working Papers, Department of Economics 2012_23, University of São Paulo (FEA-USP).
  3. 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.
  4. 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.
  5. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," CESifo Working Paper Series 3944, CESifo Group Munich.
  6. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
  7. Ran Bi, 2006. "Debt Dilution and Maturity Structure of Sovereign Bonds," 2006 Meeting Papers 652, Society for Economic Dynamics.
  8. Satyajit Chatterjee & Burcu Eyigungor, 2013. "Debt dilution and seniority in a model of defaultable sovereign debt," Working Papers 13-30, Federal Reserve Bank of Philadelphia.
  9. Leonardo Martinez & Cesar Sosa Padilla & Juan Hatchondo, 2012. "Debt dilution and sovereign default risk," 2012 Meeting Papers 974, Society for Economic Dynamics.
  10. Chamley, Christophe & Pinto, Brian, 2012. "Sovereign bailouts and senior loans," Policy Research Working Paper Series 6181, The World Bank.
  11. 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.

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