The forgotten lender: the role of multilateral lenders in sovereign debt and default

María Bru Muñoz ()
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María Bru Muñoz: Banco de España

No 2301, Working Papers from Banco de España

Abstract: The role of multilateral lenders in sovereign default has been traditionally overlooked by the literature. However, these creditors represent a significant share of lending to emerging markets and feature very distinct characteristics, such as lower interest rates and seniority. By including these creditors in a traditional DSGE model of sovereign default, I reproduce the high debt levels found in the data while maintaining default probabilities within realistic values. Additionally, I am able to analyze the role of multilateral debt in emerging economies. Multilateral loans complement private financing and reduce the incompleteness of international financial markets. Also, multilateral funding acts as an insurance mechanism in bad times, providing countries with some degree of consumption smoothing, opposite to the role of front-loading consumption fulfilled by private financing.

Keywords: sovereign debt and default; IFIs; multilateral institutions; seniority; consumption smoothing; emerging markets (search for similar items in EconPapers)
JEL-codes: F34 F35 G15 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2023-01
New Economics Papers: this item is included in nep-des, nep-dge, nep-fdg and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2301

DOI: 10.53479/25026

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