On the Role and Effects of IMF Seniority

Diego Saravia.
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Diego Saravia.: Instituto de Economía. Pontificia Universidad Católica de Chile.

No 317, Documentos de Trabajo from Instituto de Economia. 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.

Keywords: Seniority; sovereign debt; IMF; ex-ante; ex-post; welfare effects (search for similar items in EconPapers)
JEL-codes: E00 F30 F34 F40 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-mac
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https://www.economia.uc.cl/docs/doctra/dt-317.pdf (application/pdf)

Related works:
Journal Article: On the role and effects of IMF seniority (2010)
Working Paper: On The Role and Effects of IMF Seniority (2009)
Working Paper: On the Role and E ects of IMF Seniority (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:317

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