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Information as a Substitute for Bailouts in Sovereign Debt Markets

Author

Listed:
  • Duane Rockerbie

    (University of Lethbridge)

  • Stephen Easton

    (Simon Fraser University)

Abstract

This paper argues that multilateral financial institutions (MFIs), such as the International Monetary Fund, play an important informational role in international financial markets. By providing low-cost and high quality information, that is otherwise very costly for private lenders to obtain, the MFI allows a private lender to form a more accurate estimate of the credit-worthiness of a sovereign borrower. This creates a positive externality for private lenders and for sovereign borrowers with low risk credit ratings that are revealed by the provision of MFI information. The MFI can choose to internalize the negative externality created for sovereign borrowers who are revealed to be a higher credit risk by providing stand-by commitments to the sovereign. We construct a formal model of the private lenders decision to purchase costly information about the sovereign borrower. The model suggests that the free provision of MFI information has greater positive effects on financial markets the less risk-averse the private lender, the less information the private lender already has, the greater the size of the loan, and the smaller the expected default probability of the sovereign borrower.

Suggested Citation

  • Duane Rockerbie & Stephen Easton, 2003. "Information as a Substitute for Bailouts in Sovereign Debt Markets," International Finance 0303003, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0303003 Note: Type of Document - MSWord; prepared on IBM PC ; to print on HP; pages: 24 ; figures: included
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    References listed on IDEAS

    as
    1. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 79-90.
    2. Barney, Douglas K & Alse, Janardhanan A, 2001. "Predicting LDC Debt Rescheduling: Performance Evaluation of OLS, Logit, and Neural Network Models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 20(8), pages 603-615, December.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. Demirguc-Kunt, Asli & Huizinga, Harry, 1993. "Official Credits to Developing Countries: Implicit Transfers to the Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 430-444, August.
    5. Hwang Hae-shin, 1993. "Optimal Information Acquisition for Heterogenous Duopoly Firms," Journal of Economic Theory, Elsevier, vol. 59(2), pages 385-402, April.
    6. Eckaus, Richard S., 1982. "Observations on the conditionality of international financial institutions," World Development, Elsevier, vol. 10(9), pages 767-780, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    information default bailouts IMF;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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