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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

Suggested Citation

  • Diego Saravia, 2004. "On the Role and E ects of IMF Seniority," Econometric Society 2004 Latin American Meetings 131, Econometric Society.
  • Handle: RePEc:ecm:latm04:131
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Diego Saravia, 2013. "Vulnerability, Crises and Debt Maturity: Do IMF Interventions Increase Reliance on Short-Term Debt?," International Finance, Wiley Blackwell, vol. 16(3), pages 311-331, December.
    3. Corsetti, G. & Erce, A. & Uy, T., 2017. "Official Sector Lending Strategies During the Euro Area Crisis," Cambridge Working Papers in Economics 1730, Faculty of Economics, University of Cambridge.
    4. 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.
    5. Boz, Emine, 2011. "Sovereign default, private sector creditors, and the IFIs," Journal of International Economics, Elsevier, vol. 83(1), pages 70-82, January.
    6. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Debt dilution and seniority in a model of defaultable sovereign debt," Working Papers 12-14, Federal Reserve Bank of Philadelphia.
    7. Gonçalves, Carlos Eduardo & Guimaraes, Bernardo, 2015. "Sovereign default risk and commitment for fiscal adjustment," Journal of International Economics, Elsevier, vol. 95(1), pages 68-82.
    8. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    9. Sven Steinkamp & Frank Westermann, 2017. "Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 169-178, April.
    10. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," Working Papers 92, Institute of Empirical Economic Research, Osnabrueck University, revised 25 Jul 2017.
    11. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    12. Sven Steinkamp & Frank Westermann, 2014. "The role of creditor seniority in Europe's sovereign debt crisis," Economic Policy, CEPR;CES;MSH, vol. 29(79), pages 495-552, July.
    13. 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.
    14. Chamley, Christophe & Pinto, Brian, 2012. "Sovereign bailouts and senior loans," Policy Research Working Paper Series 6181, The World Bank.
    15. 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.

    More about this item

    Keywords

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

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E0 - Macroeconomics and Monetary Economics - - General

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