Moral Hazard and International Crisis Lending: A Test

Giovanni Dell'ariccia, Jeromin Zettelmeyer and Isabel Schnabel

No 2002/181, IMF Working Papers from International Monetary Fund

Abstract: We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.

Keywords: WP; emerging market; financial crisis; international crisis; null hypothesis; Moral hazard; international lending; financial crises; sovereign debt; crisis lending; investor risk; crisis-preventing effect; issue decision; crisis probability; crisis period; Russian crisis; No. of period; crisis loan; issue spread; short-term debt; No. country; Yield curve; Emerging and frontier financial markets; Securities markets; Global; Africa; Asia and Pacific (search for similar items in EconPapers)
Pages: 55
Date: 2002-10-01
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Citations: View citations in EconPapers (70)

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