The Effect of IMF Lending on the Probability of Sovereign Debt Crises

Markus Jorra

No 201026, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We nd that IMF programs signifcantly increase the probability of subsequent sovereign defaults by approximately 1.5 to 2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by speci cations that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to scal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the e ects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible.

Keywords: IMF programs; Sovereign defaults; Bivariate probit; International Financial Architecture (search for similar items in EconPapers)
JEL-codes: C25 C35 F33 F34 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010
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https://www.uni-marburg.de/en/fb02/research-groups ... rs/26-2010_jorra.pdf First version, 2010 (application/pdf)

Related works:
Journal Article: The effect of IMF lending on the probability of sovereign debt crises (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201026

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