On the Role and E ects of IMF Seniority

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