The Kiss of Death: IMF Subsidies in Sovereign Debt Markets

Stephen T. Easton and Duane Rockerbie ()

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: This paper explores the effects of official creditor subsidies to private lenders on loan pricing and credit availability. A two-period model is developed which includes a private lender, a sovereign borrower and an official creditor. The presence of credible sovereign collateral is shown to be critical to the behavior of the official creditor, even though the collateral need never be seized. The probability of sovereign default is derived in a formal way. The "kiss of death" occurs when official creditor participation does not reduce the probability of default by enough to outweigh the increase in the expected loss to the private lender if default occurs. The result becomes stronger the riskier the sovereign borrower. The model suggests a different, more supervisory role for official creditors, particularly the IMF

Keywords: DEBT; INTERNATIONAL FINANCE; CREDIT; RISK (search for similar items in EconPapers)
JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 1999

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