2023 THE FORGOTTEN LENDER: THE ROLE OF MULTILATERAL LENDERS IN SOVEREIGN DEBT AND DEFAULT
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THE FORGOTTEN LENDER: THE ROLE OF MULTILATERAL LENDERS IN 2023 SOVEREIGN DEBT AND DEFAULT Documentos de Trabajo N.º 2301 María Bru Muñoz
THE FORGOTTEN LENDER: THE ROLE OF MULTILATERAL LENDERS IN SOVEREIGN DEBT AND DEFAULT
THE FORGOTTEN LENDER: THE ROLE OF MULTILATERAL LENDERS IN SOVEREIGN DEBT AND DEFAULT María Bru Muñoz (*) BANCO DE ESPAÑA (*) Banco de España, calle de Alcalá, 48, 28014, Madrid, Spain; e-mail address: maria.bru@bde.es. I would like to thank Hernán D. Seoane, Carlos Pérez Montes, Almuth Scholl, Marija Vukotic, Beatriz de Blas, Andrés Erosa, Emircan Yurdagul, and seminar participants at Universidad Carlos III de Madrid and Banco de España for valuable comments and suggestions. https://doi.org/10.53479/25026 Documentos de Trabajo. N.º 2301 January 2023
The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the Internet at the following website: http://www.bde.es. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. © BANCO DE ESPAÑA, Madrid, 2023 ISSN: 1579-8666 (on line)
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. JEL classification: F34, F35, G15.
Resumen Tradicionalmente, la literatura sobre default soberano ha pasado por alto el papel de los prestamistas multilaterales. Sin embargo, estos acreedores suponen un porcentaje significativo de los préstamos a los países emergentes y presentan una serie de características que los hacen muy diferentes, como tasas de interés más bajas o ser acreedores preferentes, entre otras. Al incluir a estos prestamistas en un modelo de equilibrio general dinámico estocástico tradicional de default soberano, puedo reproducir los altos niveles de deuda encontrados en los datos y mantener las probabilidades de default dentro de valores realistas. Además, analizo el papel de la deuda multilateral en las economías emergentes. Los préstamos multilaterales complementan la financiación privada y reducen la falta de completitud de los mercados financieros internacionales. Asimismo, la financiación multilateral actúa como un mecanismo de seguro en tiempos difíciles, lo que brinda a los países un cierto grado de suavización del consumo, en contraposición al papel de anticipación del consumo que cumple el financiamiento privado. Palabras clave: deuda y default soberanos, instituciones financieras internacionales, instituciones multilaterales, orden de prelación de pago, suavización del consumo, mercados emergentes. Códigos JEL: F34, F35, G15.
1 Introduction
1 Introduction
The presence of heterogeneous lenders in sovereign borrowing and default, and partic-
The presence of heterogeneous lenders in sovereign borrowing and default, and partic-
ularly, the role of multilateral institutions, has been generally overlooked by sovereign
ularly, the role of multilateral institutions, has been generally overlooked by sovereign
default models. Nevertheless, official lenders,1 which comprise bilateral and multilateral
default models. Nevertheless, official lenders,1 which comprise bilateral and multilateral
creditors, are the main source of funding for developing economies. These lenders tend
creditors, are the main source of funding for developing economies. These lenders tend
to offer loans at lower interest rates and higher maturities than private lenders, which
to offer loans at lower interest rates and higher maturities than private lenders, which
are mainly banks and bondholders. In spite of the importance of official lenders in gen-
are mainly banks and bondholders. In spite of the importance of official lenders in gen-
eral, and multilateral lenders in particular, the sovereign default literature on non-private
eral, and multilateral lenders in particular, the sovereign default literature on non-private
creditors has primarily focused on the International Monetary Fund (IMF). This may be
creditors has primarily focused on the International Monetary Fund (IMF). This may be
related to the role of the IMF as a bailout agency, together with the conditionality as-
related to the role of the IMF as a bailout agency, together with the conditionality as-
sociated to its loans, and this predominance has occurred despite the relatively small
sociated to its loans, and this predominance has occurred despite the relatively small
share that IMF debt represents in total lending2 (see Table 1). In fact, most papers that
share that IMF debt represents in total lending2 (see Table 1). In fact, most papers that
approach non-private lending do so from the bailout perspective, not considering the
approach non-private lending do so from the bailout perspective, not considering the
overall effect that official financing has on borrowing and default. However, in developing
overall effect that official financing has on borrowing and default. However, in developing
countries, official loans —bilateral and multilateral— are used not only in severe crises,
countries, official loans —bilateral and multilateral— are used not only in severe crises,
but also as part of their regular funding.
but also as part of their regular funding.
Multilateral development banks (MDBs), which include the World Bank and other
Multilateral development banks (MDBs), which include the World Bank and other
regional development banks such as the European Investment Bank (EIB) or the Inter-
regional development banks such as the European Investment Bank (EIB) or the Inter-
American Development Bank (IADB), are a significant source of funding for developing
American Development Bank (IADB), are a significant source of funding for developing
economies. In general, these institutions aim at promoting economic development and
economies. In general, these institutions aim at promoting economic development and
social progress through the funding of projects in areas such as infrastructure, education,
social progress through the funding of projects in areas such as infrastructure, education,
health, etc., and also through budget support, mainly in low and middle-income coun-
health, etc., and also through budget support, mainly in low and middle-income coun-
tries.3
tries.3
Multilateral lenders feature very distinct characteristics: they generally impose no
Multilateral lenders feature very distinct characteristics: they generally impose no
conditionality; they keep financing countries after they default to private lenders, i.e.
1
Official financing, according to International Debt Statistics database (IDS) by the World Bank
they do not impose financial exclusion after a default to private lenders; they are the
are 1“loans from international organizations (multilateral loans) and loans from governments (bilateral
Official financing, according to International Debt Statistics database (IDS) by the World Bank
loans)”
are “loans
only2 senior from international
creditors organizations
together with the (multilateral
IMF; andloans) theyand loans
offer frominterest
lower governments (bilateral
rates. 4
Ad-
Considering as total lending the sum of total public and publicly guaranteed debt and use of IMF
loans)”
2 as defined in IDS.
credit
ditionally, multilateral
Considering lenders
as total lending theare
sumusually
of total repaid in full
public and afterguaranteed
publicly they experience
debt and ausedefault,
of IMF
3
creditAccording
as definedtoinIDS,
IDS. multilateral loans include “loans and credits from the World Bank, regional
being
3 this type
development
According to of
banks, default,
and
IDS, other indeed, an include
multilateral
multilateral loans infrequent event.
and intergovernmental
“loans Then, whatthe
agencies.
and credits from areWorld
the consequences
Excluded are loans
Bank, from
regional
funds administered
development banks, by another
and international organization
multilateral on behalf of a agencies.
and intergovernmental single donor government;
Excluded thesefrom
are loans are
of a cheap
classified
funds and senior
as loans
administered from flow of fundsorganization
governments.”
by an international on intereston rate spreads,
behalf debtdonor
of a single levelsgovernment;
and default prob-
these are
classified as loans from governments.”
abilities? How do private creditors react to the fact that multilateral creditors will be
2
repaid
7 first in case of default?
BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 2301 2
In order to analyze this issue, I develop a DSGE model of sovereign default with twoconditionality; they keep financing countries after they default to private lenders, i.e.
they do not impose financial exclusion after a default to private lenders; they are the
conditionality; they keep
only senior creditors financing
together countries
with the afterthey
IMF; and theyoffer
default to interest
lower private rates.
lenders,
4 i.e.
Ad-
they do not
ditionally, impose financial
multilateral lendersexclusion after
are usually a default
repaid in full to private
after they lenders; they
experience are the
a default,
only
beingsenior creditors
this type together
of default, withanthe
indeed, IMF; and
infrequent theyThen,
event. offer what
lower are
interest rates.4 Ad-
the consequences
ditionally, multilateral
of a cheap and lenders
senior flow are usually
of funds repaid
on interest rateinspreads,
full after they
debt experience
levels a default,
and default prob-
being this How
abilities? type of
do default,
private indeed, anreact
creditors infrequent
to theevent. Then,
fact that what are the
multilateral consequences
creditors will be
of a cheap
repaid firstand senior
in case of flow of funds on interest rate spreads, debt levels and default prob-
default?
abilities? How do private creditors react to the fact that multilateral creditors will be
repaid first in
In order to case of default?
analyze this issue, I develop a DSGE model of sovereign default with two
different lenders from which countries may borrow simultaneously: private lenders and
In order to
multilateral analyze this
institutions. issue,
The I developlender
multilateral a DSGE modelthe
features of sovereign defaultcharacter-
aforementioned with two
different lenders
istics, that from which
is, seniority, lowercountries may borrow
interest rates, simultaneously:
no conditionality, lack ofprivate lenders
financial and
exclusion
multilateral institutions.
after a private default andThe multilateralafter
full repayment lender features
a default to the aforementioned
multilateral character-
institutions them-
istics,
selves. that
To is,
theseniority,
best of mylower interest rates,
knowledge, no conditionality,
a lender that combineslack of characteristics
these financial exclusion
has
after a private
not been fully default and in
portrayed fullDSGE
repayment after default
sovereign a defaultmodels.
to multilateral
Some ofinstitutions them-
these attributes
selves. To included
have been the best in
of sovereign
my knowledge,
defaultamodels
lender that
that feature
combines
an these
officialcharacteristics has
lender that offers
not beenloans,
bailout fully typically
portrayedwith
in DSGE sovereignHowever,
conditionality. default models.
all theseSome of these
elements haveattributes
not been
have been together
portrayed included within
in sovereign default
a lender that models that creditor
is a regular feature an official
of the lender that offers
country.
bailout loans, typically with conditionality. However, all these elements have not been
portrayed together within
By introducing a lender lender
a multilateral that is with
a regular
the creditor of the country.
aforementioned characteristics, the
model is able to generate high levels of public debt, 50 percent in the benchmark model
By introducing
—similar to what is afound
multilateral lenderwith
in the data—, withvery
the reasonable
aforementioned characteristics,
levels of the
default, and with
model is able
a degree to generate
of patience that high levelsthan
is higher of public
many debt, 50 this
used in percent in the
strand benchmark
of the literaturemodel
and,
—similar
therefore, to whattoisthe
closer found in the data—,
microeconomic with very
evidence. reasonable levels
Furthermore, of default, and
the combination with
between
aseniority
degree of
andpatience
recoverythat is that
rates higher than many
I develop used
in this in this
model strand
gives rise toofathe literature
novel and,
private debt
therefore, closerwhich
price function, to theismicroeconomic
an important evidence.
difference Furthermore,
with respect the combination
to the between
existing literature
seniority and recovery
and a contribution to rates thatthanks
it. Also, I develop in this
to this modelI gives
setting, rise to
am able to disentangle
a novel private
the debt
role
price function, lending
of multilateral which isvis-à-vis
an important
privatedifference
financing,with respect
which to theimportant
is another existing literature
contribu-
and
tion aofcontribution
this article. toMultilateral
it. Also, thanks to acts
funding this setting, I am ablemechanism
as an insurance to disentangle the role
for countries
of
andmultilateral lending vis-à-vis private
fulfills a consumption-smoothing financing,
role which
—opposite is another
to the important
front-loading contribu-
use of private
tion4 Also,
funds—.of this
As article. Multilateral
a result,loans
multilateral multilateral funding
lending
tend to offer
acts as an complement
longer becomes
insurance
maturities,abut
mechanism
to private
I abstract from
for countries
financing.
this dimension in this
paper.
and fulfills a consumption-smoothing role —opposite to the front-loading use of private
1.14 Also,Facts
multilateral loans tend to offer longer maturities,
3 but I abstract from this dimension in this
paper.
In what follows, I will discuss the empirical facts that motivate the inclusion of a lender
8
BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 2301 3
with the aforementioned characteristics in a version of Arellano (2008) sovereign default
model.funds—. As a result, multilateral lending becomes a complement to private financing.
1.1 Facts
funds—. As a result, multilateral lending becomes a complement to private financing.
In what follows, I will discuss the empirical facts that motivate the inclusion of a lender
with the aforementioned characteristics in a version of Arellano (2008) sovereign default
1.1 Facts
model.
In what follows, I will discuss the empirical facts that motivate the inclusion of a lender
withFact
the 1:
aforementioned
Multilateralcharacteristics
lending is onein aofversion of Arellano
the main sources(2008) sovereign
of funding in default
devel-
model.
oping countries. Multilateral loans, which exclude IMF loans, represent a significant
share of total lending, while IMF loans, a typical focus in the literature, account for a
Fact
much 1: modest
more Multilateral
share.5lending is one
Multilateral of the
loans mainfor
account sources
almostof
a funding in devel-
third of total lend-
oping countries.
ing as shown Multilateral
in Table 1 and areloans, which exclude
approximately IMFasloans,
as high represent
bilateral a significant
lending, which is
share of total lending,
the remaining share of while
officialIMF loans,
debt. a typical
In this regard,focus
Horninetthe
al. literature, account6 for
(2021) underscore thata
much more
“During the modest share.5 Multilateral
1970s, multilateral loans
lending first account
overtook for almost
bilateral a third
lending and of
hastotal lend-
remained
ing as shown
dominant sinceinthen”
Table(Horn
1 andetare
al., approximately
2021, p. 11). as high as bilateral lending, which is
the remaining share of official debt. In this regard, Horn et al. (2021) underscore6 that
“During the 1970s, multilateral lending first overtook bilateral lending and has remained
Table 1: Debt by Creditor (%)
dominant since then” (Horn et al., 2021, p. 11).
Lender As Share of Total Debt As Share of GDP
and Use of IMF Credit
Private Debt Table 1: Debt by27.8
Creditor (%) 11.2
Official Debt 66.3 31.9
of which Multilateral Debt As Share of
Lender 32.4
Total Debt As Share 14.3of GDP
IMF Debt and Use of5.9 IMF Credit 2.6
Private Debt 27.8 11.2
Official Debt 66.3 31.9
Multilateral loans are also important in terms of GDP. Indeed multilateral funding
of which Multilateral Debt 32.4 14.3
IMF Debt
represents 5.9
on average 14 percent of GDP in developing 2.6share of GDP
countries, a higher
than bank loans and bonds altogether, which account for roughly 11 percent of GDP, and
wellMultilateral loansshare.
above the IMF are also important in terms of GDP. Indeed multilateral funding
represents on average 14 percent of GDP in developing countries, a higher share of GDP
thanFact
bank2:loans and bonds altogether,
Conditionality which account
is not present in most formultilateral
roughly 11 percent
loans.ofCondition-
GDP, and
5
In this paper I use data that comes mainly from Beers et al. (2020b) for default data, and World
well
ality above
Bank’s the IMFDebt
isInternational
an important share.
element of (IDS)
Statistics IMF loans, but Development
and World it is not necessarily
Indicatorsafor
widespread feature
other economic in-
dicators. Using the aforementioned databases, I create an unbalanced panel of 60 lower-middle and
of multilateral
upper-middle loans.
income Conditionality
countries with data onis defined
sovereignindebt
Babbandand Carruthers
default from 1970 (2008) as “making
to 2015. For more
details on the data used, please see Section A.3.
the65disbursement
Horn
In thisetpaper
al. (2021)of include
I use resources
data that toloans
IMFcomes national
as partgovernments
mainly of multilateral
from contingent
lending
Beers et al. and
(2020b) on the
fordata are performance
default scaled by the
data, and of
US
World
GDP rather
Bank’s than by each
Debtcountry’s GDP.
certainInternational
policies” (Babb Statistics (IDS) and2008,
and Carruthers, Worldp.Development
13) and in Indicators
Koeberlefor andother economic
Malesa in-
(2005)
dicators. Using the aforementioned databases, I create an unbalanced panel of 60 lower-middle and
upper-middle
as “the specific income setcountries with data
of conditions on sovereign
attached debtdisbursement
4to the and default fromof 1970 to 2015. For
policy-based more
lending
details on the data used, please see Section A.3.
6
or budget
Horn et support” (Koeberle
al. (2021) include and Malesa,
IMF loans as part of 2005, p. 6).lending
multilateral Before
and1980 multilateral
data are insti-
scaled by the US
GDP rather than by each country’s GDP.
tutions had almost no loans with conditionality. As explained in Babb and Carruthers
9
(2008),
BANCO DE ESPAÑA 4
before 1980 the World Bank and other
DOCUMENTO DE TRABAJO N.º 2301
multilateral institutions offered almost
only the so-called investment lending, which is typically not associated to conditionality.
After 1980 conditionality was part of some loans, but in a small share of the total mul-Fact 2: Conditionality is not present in most multilateral loans. Condition-
ality is an important element of IMF loans, but it is not necessarily a widespread feature
ality is an important element of IMF loans, but it is not necessarily a widespread feature
of multilateral loans. Conditionality is defined in Babb and Carruthers (2008) as “making
of multilateral loans. Conditionality is defined in Babb and Carruthers (2008) as “making
the disbursement of resources to national governments contingent on the performance of
the disbursement of resources to national governments contingent on the performance of
certain policies” (Babb and Carruthers, 2008, p. 13) and in Koeberle and Malesa (2005)
certain policies” (Babb and Carruthers, 2008, p. 13) and in Koeberle and Malesa (2005)
site“the
as specific
to private set of conditions
creditors. 7
Furthermore, attached to theA.4,
in Section disbursement of policy-based
I estimate financial exclusion lending
from
as “the specific set of conditions attached to the disbursement of policy-based lending
or budget support”
multilateral (Koeberle
lending when a defaultand toMalesa,
private2005, p. 6).
creditors Before
takes place1980
finding multilateral insti-
similar results.
or budget support” (Koeberle and Malesa, 2005, p. 6). Before 1980 multilateral insti-
tutions had almost no loans with conditionality. As explained in Babb and Carruthers
tutions had almost no loans with conditionality. As explained in Babb and Carruthers
(2008),
Factbefore 1980 the World
4: Multilateral creditorsBank areandsenior
other multilateral
lenders as they institutions
enjoy the offered almost
so-called
(2008), before 1980 the World Bank and other multilateral institutions offered almost
only the so-called
preferred creditorinvestment
status. lending,
As shown which is typically
empirically bynot associated
Schlegl et al. to conditionality.
(2019) multilat-
only the so-called investment lending, which is typically not associated to conditionality.
Afterinstitutions
eral 1980 conditionality
and the IMF was areparttheof only
somesenior
loans,creditors,
but in a givensmall their
sharepreferred
of the total mul-
creditor
After 1980 conditionality was part of some loans, but in a small share of the total mul-
tilateralAccording
status. lending. For instance
to Schlegl —and
et al. using
(2019) thethebasisWorld Bank
for their as an example—,
seniority is that it is Koeberle
acknowl-
tilateral lending. For instance —and using the World Bank as an example—, Koeberle
and Malesa
edged by the(2005) show that
main creditor only around
governments and 10-20 percentinstitutions
important of operations and 30 percent
in financial markets, of
and Malesa (2005) show that only around 10-20 percent of operations and 30 percent of
volumes
like from Similarly,
Moody’s. 1980 to 2003 in theand
Cordella World
PowellBank werehighlight
(2021) adjustment thatoperations,
the preferred which may
creditor
volumes from 1980 to 2003 in the World Bank were adjustment operations, which may
involve“is
status conditionality,
not stronglywhile
backed theinhighest share oflaw”(Cordella
international loans was still and thatPowell,
of investment
2021, p. lending.
2). In
involve conditionality, while the highest share of loans was still that of investment lending.
the same vein, Perraudin et al. (2016) highlight that the preferred creditor status is not
Fact 3: Multilateral
a contractual feature, but “a creditors keep lending
market practice to countries
attributable that arefaced
to the incentives in default
by dis-
Fact 3: Multilateral creditors keep lending to countries that are in default
with private
tressed sovereign creditors.
borrowers” The lack of financial
(Perraudin exclusion
et al., 2016, from
p. 9). multilateral
According financing et
to Perraudin after
al.
with private creditors. The lack of financial exclusion from multilateral financing after
defaulting
(2016), thetopreferred
private creditors is key, is
creditor status since
theitresult
casts ofdoubt on onetrying
countries of thetomain avoidassumptions
defaulting
defaulting to private creditors is key, since it casts doubt on one of the main assumptions
of sovereign
to multilateral default models: since
institutions financial
theseexclusion
keep funding(also called financial
countries whenautarky). As a mat-
private lenders do
of sovereign default models: financial exclusion (also called financial autarky). As a mat-
ter ofwhich
not, fact, quantitative sovereign
in turn is in line with thedefault
lack models assume
of financial that countries
exclusion repay their
after a default debts
to private
ter of fact, quantitative sovereign default models assume that countries repay their debts
in order to
lenders. avoid thetheir
Moreover, penalties thatcreditor
preferred a default involves,
status namely to
contributes output
the highlosses and standing
credit financial
in order to avoid the penalties that a default involves, namely output losses and financial
exclusion.
that Financial
multilateral exclusionenjoy,
institutions is usually
as it defined as the by
is also shown inability of obtaining
Perraudin financing
et al. (2016). 8 in
exclusion. Financial exclusion is usually defined as the inability of obtaining financing in
international markets. However, multilateral banks keep offering funds to countries after
international markets. However, multilateral banks keep offering funds to countries after
theyFact
default to private lenders.
5: Multilateral lenders tend to offer lower interest rates than private
they default to private lenders.
creditors. Multilateral lenders tend to offer better financial terms than private cred-
TheInempirical
itors. evidence
this regard, in this
Cordella andregard
Powellincludes
(2021)Levy Yeyatithat
highlight (2009) who shows financial
international that pri-
The empirical evidence in this regard includes Levy Yeyati (2009) who shows that pri-
vate lendingcan
institutions is negatively correlated
“lend limited amounts withatdefault,
close towhile official lending
the risk-free rate under is notmost
significantly
circum-
vate lending is negatively correlated with default, while official lending is not significantly
affected by it. Alsoand
stances”(Cordella Avellán
Powell, et 2021,
al. (2021)
p. 2).findIn empirical
particular,evidence supporting
as explained this lack
in Nelson (2020) of
affected by it. Also Avellán et al. (2021) find empirical evidence supporting this lack of
financial
“Due exclusion,
to the financialsince
backingtheyofshow
their how
member during fiscalgovernments,
country crises, whichthe include
MDBssovereign
are able
financial exclusion, since they show how during fiscal crises, which include sovereign
default,
to borrow multilateral
money in development
world capitalbanks marketsdo not decrease
at the lowesttheir funding
available to countries,
market oppo-
rates, gener-
default, multilateral development banks do not decrease their funding to countries, oppo-
ally the same rates at which developed country governments borrow funds inside their
site to private creditors.7 Furthermore, in Section A.4, I estimate financial exclusion from
own borders. The banks are able to relend this money to their borrowers at much lower
multilateral lending when a default to private creditors takes place finding similar results.
5
5
7
In Bru Muñoz (2022) I also find that official lenders do not impose financial exclusion to countries
thatFactare in 4: Multilateral
default creditors
to private lenders. are senior
Nevertheless, lenders
Flogstad as they
and Nordtveit enjoy
(2014) findthe so-called
the opposite for
concessional official lending.
preferred
8 creditor
Other authors, such status.
as Bolton As
and shown
Jeanne empirically
(2009) suggestby Schlegl
that et may
seniority al. (2019) multilat-
be related to how
difficult it is to renegotiate a given debt. They consider that countries may default on debt that is easier
eral 10 institutions
to renegotiate
BANCO DE ESPAÑA
and the IMF are the only senior creditors, given their preferred creditor
and repay debt that is harder to renegotiate, giving rise to some kind of de facto seniority.
DOCUMENTO DE TRABAJO N.º 2301
status. According to Schlegl et al. (2019) the basis for their seniority is that it is acknowl-
6
edged by the main creditor governments and important institutions in financial markets,multilateral lending when a default to private creditors takes place finding similar results.
Fact 4: Multilateral creditors are senior lenders as they enjoy the so-called
7
site to private
preferred creditors.
creditor Furthermore,
status. As shownin Section A.4, by
empirically I estimate
Schlegl financial exclusion
et al. (2019) from
multilat-
multilateral lending
eral institutions andwhen a default
the IMF to only
are the private creditors
senior takesgiven
creditors, placetheir
finding similarcreditor
preferred results.
site to private creditors.7 Furthermore, in Section A.4, I estimate financial exclusion from
status. According to Schlegl et al. (2019) the basis for their seniority is that it is acknowl-
multilateral lending when a default to private creditors takes place finding similar results.
Fact
edged by 4:
theMultilateral
main creditorcreditors
governmentsareand
senior lenders
important as they enjoy
institutions the so-called
in financial markets,
preferred
like Moody’s. creditor status.
Similarly, Cordella Asand shown
Powellempirically by Schlegl
(2021) highlight thatettheal.preferred
(2019) multilat-
creditor
Fact 4: Multilateral creditors are senior lenders as they enjoy the so-called
eral
statusinstitutions and thebacked
“is not strongly IMF are the only senior
in international creditors, given
law”(Cordella and their
Powell,preferred
2021, p.creditor
2). In
preferred creditor status. As shown empirically by Schlegl et al. (2019) multilat-
status.
the same According to Schlegl
vein, Perraudin et et
al. al. (2019)
(2016) the basis
highlight for the
that theirpreferred
senioritycreditor
is that itstatus
is acknowl-
is not
eral institutions and the IMF are the only senior creditors, given their preferred creditor
edged by the main
a contractual creditor
feature, but “agovernments
market practice and important
attributable institutions in financial
to the incentives facedmarkets,
by dis-
status. According to Schlegl et al. (2019) the basis for their seniority is that it is acknowl-
like Moody’s.
tressed sovereignSimilarly,
borrowers”Cordella and Powell
(Perraudin et al.,(2021)
2016, highlight that thetopreferred
p. 9). According Perraudincreditor
et al.
edged by the main creditor governments and important institutions in financial markets,
status
(2016),“isthenot stronglycreditor
preferred backed status
in international
is the resultlaw”(Cordella
of countriesand Powell,
trying 2021,defaulting
to avoid p. 2). In
like Moody’s. Similarly, Cordella and Powell (2021) highlight that the preferred creditor
the same vein, Perraudin
to multilateral institutionset since
al. (2016)
these highlight
keep funding that the preferred
countries creditor
when privatestatus is not
lenders do
status “is not strongly backed in international law”(Cordella and Powell, 2021, p. 2). In
anot,
contractual feature,
which in turn is inbut
line“awith
marketthe practice attributable
lack of financial to theafter
exclusion incentives
a defaultfaced by dis-
to private
the same vein, Perraudin et al. (2016) highlight that the preferred creditor status is not
tressed
lenders.sovereign
Moreover,borrowers” (Perraudin
their preferred et status
creditor al., 2016, p. 9). According
contributes to the highto Perraudin et al.
credit standing
a contractual feature, but “a market practice attributable to the incentives faced by dis-
(2016), the preferred
that multilateral creditorenjoy,
institutions statusasis itthe resultshown
is also of countries trying et
by Perraudin toal.
avoid defaulting
(2016). 8
tressed sovereign borrowers” (Perraudin et al., 2016, p. 9). According to Perraudin et al.
to multilateral institutions since these keep funding countries when private lenders do
(2016), the preferred creditor status is the result of countries trying to avoid defaulting
not,Fact
which5:inMultilateral
turn is in linelenders
with thetend lack of
to financial
offer lowerexclusion afterrates
interest a default
thantoprivate
private
to multilateral institutions since these keep funding countries when private lenders do
lenders.
creditors. Moreover, their preferred
Multilateral lenders tend creditor status
to offer contributes
better financialtoterms
the highthancredit standing
private cred-
not, which in turn is in line with the lack of financial exclusion after a default to 8private
that
itors.multilateral institutions
In this regard, Cordella enjoy,
and as it is also
Powell shown
(2021) by Perraudin
highlight et al. (2016).
that international financial
lenders. Moreover, their preferred creditor status contributes to the high credit standing
institutions can “lend limited amounts at close to the risk-free rate under most circum-
that multilateral institutions enjoy, as it is also shown by Perraudin et al. (2016).8
Fact 5: Multilateral
stances”(Cordella and Powell, lenders
2021,tendp. 2).toInoffer lower interest
particular, rates
as explained in than
Nelsonprivate
(2020)
creditors.
“Due to the Multilateral
financial backing lenders tend member
of their to offer better
countryfinancial terms the
governments, than private
MDBs arecred-
able
Fact 5: Multilateral lenders tend to offer lower interest rates than private
itors.
to borrow In this
moneyregard, Cordella
in world capitalandmarkets
Powell (2021)
at the highlight that international
lowest available market rates, financial
gener-
creditors. Multilateral lenders tend to offer better financial terms than private cred-
institutions
ally the same canrates
“lend at limited amounts atcountry
which developed close togovernments
the risk-freeborrow
rate under
fundsmost circum-
inside their
itors. In this regard, Cordella and Powell (2021) highlight that international financial
stances”(Cordella
own borders. The and banks Powell,
are able 2021, p. 2). this
to relend In particular, as explained
money to their borrowers in at
Nelson
much(2020)
lower
institutions can “lend limited amounts at close to the risk-free rate under most circum-
“Due
interest to rates
the financial
than thebacking
borrowersof their
would member country
generally havegovernments, the MDBsloans,
to pay for commercial are able if,
stances”(Cordella and Powell, 2021, p. 2). In particular, as explained in Nelson (2020)
to borrow
7
indeed,In Brusuchmoney
Muñoz
loans in
(2022)world
were alsocapital
I available tomarkets
find that at such,
thedolowest
official lenders
them. As not available
the impose
MDBs’ market
financial exclusion
non-concessional rates, gener-
to countries
lending
“Due
that aretointhe financial
default backing
to private lenders.of Nevertheless,
their member country
Flogstad and governments,
Nordtveit (2014)the findMDBs are able
the opposite for
ally
windows the same
concessional are rates at which
self-financing
official lending. anddeveloped
even generatecountrynet governments
income.”(Nelson, borrow2020,funds inside their
p. 7).
to borrow
8 money such
Other authors, in world
as Boltoncapital
and markets
Jeanne (2009)at the lowest
suggest thatavailable
seniority market rates, to
may be related gener-
how
own borders. The banks are able to relend this money to their borrowers at much lower
difficult it is to renegotiate a given debt. They consider that countries may default on debt that is easier
ally
to the same
renegotiate andrates
repayat debtwhich
that isdeveloped country governments
harder to renegotiate, borrow
giving rise to some kind funds inside
of de facto their
seniority.
Thus, the fact that multilateral lenders can offer relatively lower interest rates is
own7 Inborders. The banks are able to relend this money to their borrowers at much lower
Bru Muñoz (2022) I also find that official lenders do not impose financial exclusion to countries
linked to their ability to obtain funds at very 6 favorable rates, which in turn is related to
that are in default to private lenders. Nevertheless, Flogstad and Nordtveit (2014) find the opposite for
concessional
the87multilateralofficialinstitutions’
lending. preferred creditor status. In this regard, Cordella and Pow-
In Bruauthors,
Other Muñoz (2022)
such asI also findand
Bolton thatJeanne
official (2009)
lenderssuggest
do not that
impose financial
seniority mayexclusion to countries
be related to how
that are
difficult in
it isdefault
to to private
renegotiate a lenders.
given debt.Nevertheless,
They Flogstad
consider that and Nordtveit
countries
ell (2021) underscore for multilateral institutions that “IBRD and the four main regionalmay (2014)
default onfind the
debt opposite
that is for
easier
concessional
to renegotiateofficial
and repaylending. debt that is harder to renegotiate, giving rise to some kind of de facto seniority.
8
MDBs (ADB,
Other AfDB,
authors, suchEBRD andand
as Bolton IDB) maintain
Jeanne (2009)AAA ratings.
suggest Moody’s
that seniority may and beStandard
related to and
how
difficult it is to renegotiate a given debt. They consider that countries may default on debt that is easier
Poor’s
BANCO DE ESPAÑA 11 DOCUMENTO
both and
to renegotiate suggest
repaythese
DE TRABAJO N.º 2301
fiveisorganizations
debt that
6 enjoy giving
harder to renegotiate, preferred
rise tocreditor
some kindstatus”
9
of de facto(Cordella
seniority.
and Powell, 2021, p. 3). Therefore, the aforementioned high credit standing, linked to
6
the preferred creditor status, is a key part of the multilateral institutions’ business: it isThus, the fact that multilateral lenders can offer relatively lower interest rates is
linked to their ability to obtain funds at very favorable rates, which in turn is related to
the multilateral institutions’ preferred creditor status. In this regard, Cordella and Pow-
interest
ell (2021)rates than the
underscore forborrowers would
multilateral generally
institutions have
that to pay
“IBRD forthe
and commercial
four main loans, if,
regional
indeed,(ADB,
MDBs such loans
AfDB,were
EBRDavailable to them.
and IDB) As such,
maintain AAAthe MDBs’
ratings. non-concessional
Moody’s lending
and Standard and
windows
Poor’s are suggest
both self-financing and organizations
these five even generate enjoy
net income.”(Nelson, 2020,
preferred creditor p. 7).
status” 9
(Cordella
and Powell, 2021, p. 3). Therefore, the aforementioned high credit standing, linked to
the Thus, thecreditor
preferred fact that multilateral
status, is a key lenders can multilateral
part of the offer relatively lower interest
institutions’ rates
business: is
it is
alinked
factortothat
their ability
allows to obtain
them to raisefunds
fundsatatvery
low favorable rates,which
interest rates, whichpermits
in turnthem
is related to
in turn
theoffer
to multilateral
relativelyinstitutions’ preferred
cheaper financing creditor status. In this regard, Cordella and Pow-
to countries.
ell (2021) underscore for multilateral institutions that “IBRD and the four main regional
MDBs (ADB,Figure
AfDB,
Additionally, 1:EBRD
Probability
according toand ofand
IDB)
Dellas default
maintainand
Niepelt debtratings.
AAA
(2016) inthe
default by lender
Moody’s
low and
interest rateStandard and
that official
9
Poor’s both
offer suggest
(a) Probability
lenders these to
of default
is the result five
of organizations
each
the enjoy
(b)
creditor penalties
stronger preferred
Totalthat creditor
debt these
as % GDPstatus”
ofcreditors
in the (Cordella
can first year to
impose in
default to each of the lenders
and
By Powell,
Creditor
defaulting 2021,Probability
p. since
countries, 3). Therefore, the aforementioned
theseofpenalties
default reduce the probability high credit standing,
of default.10 linked to
Paris
the Club creditor status,6.0
preferred is a key part of the
Defaultmultilateral
with any lender institutions’ business: it is
49.7
IMF 1.1
aIBRD
factor
Fact that allows them
6: Default to 1.4
raise funds at
to multilateral low interest
lenders is anrates,
Def. with Paris Club
which permits
infrequent event. them
As ainresult
turn
74.7
toIDA 0.8 Def. with IMF 106.2
of offer relatively
these cheaper
very different and financing
specific to countries. default to multilateral lenders, repre-
characteristics,
Banks 2.9 Def. with IBRD 77.2
Bondsby the IBRD and the 3.5
sented International Development Association (IDA)11 in panel (a)
Def. with IDA 102.4
Note: The probability of default is computed by
of Additionally,
Figure
dividing according
the1,estimated
is a rare event. to
number Dellasto
Default
of default and Niepelt (2016)
multilateral
episodes the lowtends
institutions
Def. with Banks
interest rate that
to occur
50.3
official
in periods
with a specific
lenders offer lender
is the byresult
the number
of the of years withpenalties that these creditors can impose to
of high debt
positive debt as share
stock with of GDP,
that as stronger
lender. shown in panel (b)
For more of Figure 1. Therefore,
Def. to Bonds 50.2
countries
information
defaulting on this estimation,
countries, since please
these see Bru
penalties 60 10 80
default to multilateral
Muñoz (2022).
lenders when either reduce
GDP isthevery probability
0
low, of 40
or20totaldefault.
debt 100
% of GDPis very high.
9
The multilateral development banks (MDBs) listed above are the International Bank for Reconstruc-
tion and Development (IBRD), the Asian Development Bank (ADB), the African Development Bank
Fact 7:
Fact 6: Multilateral
Default to multilateral are lenders is full
an infrequent event. As a aresult
(AfDB), the European Bank forlenders
Reconstruction repaid in
and Development after they
(EBRD) experience
and the the Inter-American de-
Development
of theseAs veryBank (IDB).
different and The IBRD is one of the two branches of the World Bank that offer loans to
fault.
governments Perraudin al. specific
in developingetcountries.
characteristics,
(2016) highlight, in thedefault
severaltodefaults
multilateral lenders,
analyzed repre-
in Cruces
10 11 how countries
sented
and by the IBRD
An example
Trebesch of one ofand
(2013), these
thosethe International
penalties
to Development
is presented
multilateral by Lang et al.Association
development were (IDA)
(2021) who underscore
banks in panel (a)
never accompanied
that were in arrears to the World Bank or to the IMF were excluded from the Debt Service Suspension
of Figure
Initiative,
by 1, isinaindebt’s
which,
a decrease rare event.
the context
face of Default andtoalso,
the Covid-19
value multilateral
pandemic, institutions
the few provided
defaults tends
temporary
to the to occur
debt relief ininthe
Inter-American periods
means
Devel-
of a temporary suspension of debt service to official bilateral creditors.
of 11high
opmentIBRD debt
and as
Bank share
never
IDA of two
areinvolved
the GDP, debtaswrite-downs.
branches shown
of the in panel
World (b)that
Likewise,
Bank of Schlegl
Figure
offer 1. to
et
loans Therefore,
al. countries
(2019) underscore
governments in devel-
oping countries. These agencies are not the only multilateral lenders, but these are the only for which
default
that thetoIMF
disaggregated
multilateral
and
data on the
lenders
World
defaulted
when
Bank
debt
either GDPgranted
have only
is available
is etvery
in Beers
low, or
debt
al. (2020b),
total
write-downsdebt is
therefore I use
very high.
exceptionally
them in this
paper9 as a proxy for all defaults to multilateral lenders.
The multilateral development banks (MDBs) listed above are the International Bank for Reconstruc-
under the Multilateral Debt Relief Initiative from 2005, but, as highlighted by Cordella
tion and Development (IBRD), the Asian Development Bank (ADB), the African Development Bank
(AfDB),
and the European
Powell Bankalso
(2021), who for Reconstruction 7 Development
and
show similar findings, (EBRD)that
the countries and the the Inter-American
benefited from this
Development Bank (IDB). The IBRD is one of the two branches of the World Bank that offer loans to
program
governments didinnot have access
developing to international private financial markets.
countries.
10
An example of one of these penalties is presented by Lang et al. (2021) who underscore how countries
that were in arrears to the World Bank or to the IMF were excluded from the Debt Service Suspension
Initiative, which, in the context of the Covid-19 pandemic, provided temporary debt relief in the means
Fact 8: Multilateral funding is part of the regular funding of countries
of a temporary suspension of debt service to official bilateral creditors.
11
ratherIBRD and an
than IDAoccasional
are the two branches
bailout. of the World Bankinstitutions
Multilateral that offer loans
tendto to
governments in devel-
act as long-term
oping countries. These agencies are not the only multilateral lenders, but these are the only for which
disaggregated
lenders data on
that fund defaulted
either debtprojects
specific is available in Beers et
or provide al. (2020b),
budget therefore
support, whileI the
use IMF
them tends
in this
paper as a proxy for all defaults to multilateral lenders.
to act as a bailout agency. In this regard, as highlighted in Horn et al. (2021) “In 1944,
12
BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 2301 7
the IMF was founded with the aim of providing short-term official funds to countries
with temporary balance-of-payments problems, alongside with the World Bank that was
intended to provide long-term development and reconstruction funds” (Horn et al., 2021,Paris Club 6.0 Default with any lender 49.7
IMF 1.1
Def. with Paris Club 74.7
IBRD 1.4
IDA 0.8 Def. with IMF 106.2
Banks Figure 1: Probability
2.9 of default and debt in default by lender
Def. with IBRD 77.2
Bonds
(a) Probability of default to3.5
each creditor (b) Total debt as % of GDP in the first year in
Def. with IDA 102.4
Note: The probability of default is computed by default to each of the lenders
dividing the estimated
By Creditor number of default
Probability episodes
of default Def. with Banks 50.3
with a specific lender by the number of years with
Paris Club 6.0 Def. to Bonds 50.2
positive debt stock with that lender. For more Default with any lender 49.7
IMF
information on and
this “financial 1.1
estimation, rescue”
please see 12
Bru
development” loans. TheDef.first category
with Paris Club
0 20—closer
40 to60 the activity
% of GDP 74.7
80 100 of
IBRD(2022).
Muñoz 1.4
multilateral
IDA developments institutions—
0.8 tends to beDef.substantially
with IMF higher than the latter 106.2
Banks 2.9 Def. with IBRD 77.2
—closer
Fact to
7: the IMF role— from
Multilateral lenders the fifties, and except
are repaid in full in the years
after of the
they Great Financial
experience a de-
Bonds 3.5
Def. with IDA 102.4
Crisis The
Note:
fault. when they become
probability
As Perraudin very
of default
et al.
issimilar.
(2016)
computed by
highlight, in the several defaults analyzed in Cruces
dividing the estimated number of default episodes Def. with Banks 50.3
with a specific lender by the number of years with
and Trebesch (2013), those to multilateral development banks were never accompanied
Def. to Bonds 50.2
positive debt stock with that lender. For more
by aIndecrease
orderonto
information reproduce
inthis face the
estimation,
debt’s facts
please
value shown
andsee infew
Bruthe
also, thisdefaults
section, I 20include
0 to the
within
Inter-American
40 60
% of GDP
80
a Devel-
DSGE
100
Muñoz (2022).
sovereign
opment default
Bank never model
involveda multilateral lender that
debt write-downs. offersSchlegl
Likewise, loans with
et al. typically lower in-
(2019) underscore
13
terestthe
that rates
IMF (asand
longtheas World
privateBank debt have
is notonly very low), that imposes no conditionality
Fact 7: Multilateral lenders are repaidgrantedin full debtafterwrite-downs
they experienceexceptionally
a de-
and that isMultilateral
under senior. Also, thisRelief multilateral creditor does not but,penalize countries byafter they
fault. theAs Perraudin etDebt Initiative
al. (2016) highlight, from
in the2005,
several as highlighted
defaults analyzed inCordella
Cruces
default to private
and lenders andshow
continues
similaroffering funding to them that in the event of from
a default
and Powell
Trebesch (2021), whothose
(2013), also to multilateral findings,
developmentthe countries
banks were never benefited
accompanied this
to privatedid
program creditors.
not have However,
access if countries default
to international tofinancial
the multilateral institution, they
by a decrease in debt’s face value and also, theprivatefew defaults markets.
to the Inter-American Devel-
face full financial autarky. The fact that countries can obtain multilateral funds after
opment Bank never involved debt write-downs. Likewise, Schlegl et al. (2019) underscore
defaulting8:to Multilateral
private lendersfunding reduces is the cost of of default, as highlighted
funding by Hatchondo
thatFact
the IMF and the World Bank havepart only grantedthe regular
debt write-downs of countries
exceptionally
et al. (2017).
rather than an occasional bailout. Multilateral institutions
under the Multilateral Debt Relief Initiative from 2005, but, as tend to act asbylong-term
highlighted Cordella
lenders
and Powellthat(2021),
fund either
who specific
also show projects
similarorfindings,
provide the budget support,
countries thatwhile the IMF
benefited fromtends
this
to Additionally,
act as did
a bailout in order
agency. to make seniority relevant in the model, I introduce recovery
program not have accessIntothis regard, as highlighted
international private financial in Horn et al. (2021) “In 1944,
markets.
ratesIMF
the for both types of with
was founded debt, thewhichaimis of
a novelty
providing in this type of official
short-term models.funds Whentodefaults
countriesto
both temporary
with lenders occur, countries must repay
balance-of-payments multilateral lenders
with in full before re-accessing,
Fact 8: Multilateral funding problems,
is part of alongside
the regular the World
funding Bank that was
of countries
first multilateral,
intended to provide and second development
long-term private financial and markets.
reconstruction This assumption ofetfull
al.,repay-
rather than an occasional bailout. Multilateral institutionsfunds” tend to (Horn
act as 2021,
long-term
ment
p. 8). to multilateral
Thus, even either
thoughlenders
someismultilateral
supported by the empirical
agencies may have evidence,
bailout as shownasabove.
programs well,
lenders that fund specific projects or provide budget support, while the IMF tends
Furthermore,
it I also include positiveIn recovery rates for private lenders to replicate what is
to isact
not
as the core
a bailout ofagency.
their lending.
In this regard,this asregard, Horn
highlighted etinal. (2021)
Horn et al.distinguish
(2021) “Inamong1944,
found
several in empirical data and in order to maintain consistency between the characteristics
the IMFtypes was of official with
founded financing
the aimaccording to theirshort-term
of providing objective. official
These funds
includeto“economic
countries
of multilateral and private lenders. 12
development” and “financial rescue” loans. The first category —closer to the activity of
with temporary balance-of-payments problems, alongside with the World Bank that was
8
multilateral developments institutions— tends to be substantially higher than the latter
intended to provide long-term development and reconstruction funds” (Horn et al., 2021,
Thanks
—closer to this
to the IMFnewrole— framework,
from the Ififties,
show and thatexcept
the inclusion of multilateral
in the years of the Great lenders pro-
Financial
p. 8). Thus, even though some multilateral agencies may have bailout programs as well,
duces higher
Crisis when theylevelsbecome
of public verydebt and realistic default probabilities, with a discount factor
similar.
it is not the core of their lending. In this regard, Horn et al. (2021) distinguish among
12
Horn et al. (2021) distinguish among several types of official financing according to their objective,
several types of development”
such as “economic official financing according
and “financial to their
rescue” objective.
loans which These
they define include“The
as follows: “economic
category
In order
economic to reproduce
development includes the
loansfacts shownextended
and grants in this for
section, I include
the financing within
of projects a DSGE
in developing
countries ranging from infrastructure investments to state-building activities. [...] financial rescue loans
sovereign default
covers loans, grants model a multilateral
and guarantees
8 that
lender
during currency, debt offers loans crises,
and banking with typically lower in-
including balance-of-
payment crises, as well as general budget support” (Horn et al., 2021, p. 14).
terest
13 rates (as long as private debt is not very low), that imposes no conditionality13
Many authors, such as Boz (2011) or Fink and Scholl (2016) among others, include conditionality in
their13
and models
that
BANCO DE ESPAÑA
is for bailout
senior. loans,this
Also, andmultilateral
even though conditionality
DOCUMENTO DE TRABAJO N.º 2301
creditor does is not
not present in most
penalize multilateral
countries after loans,
they
it might be included as a feature of this model. In principle, conditionality would make multilateral
funds relatively
default less attractive.
to private lenders and However, the overall
continues offeringgeneral equilibrium
funding to themeffects of event
in the conditionality would
of a default
depend on the different modeling choices of such conditionality and its calibration.
to private creditors. However, if countries default to the multilateral institution, theyCrisis when they become very similar.
In order to reproduce the facts shown in this section, I include within a DSGE
12
development”
sovereign andmodel
default “financial rescue” loans.
a multilateral lenderThe
thatfirst category
offers loans —closer to the activity
with typically lower in-of
multilateral
that
terestisrates developments
relatively
(as long institutions—
highasinprivate
sovereign
debtdefault tends
is not verytolow),
models. beFurthermore,
substantially
that imposes higher
this than
nopaper the latter
contributes
conditionality 13
—closer
to
andthe to theliterature
existing
that IMFAlso,
is senior. role—on from
the
this the of
role fifties, and except
multilateral
multilateral creditor debtinnot
does inthe years ofeconomies.
emerging
penalize the Greatafter
countries Financial
It is they
well
Crisis when
established
default inthey
to private become
thelenders very
literature
and similar.
that privateoffering
continues debt tends to to
funding be them
procyclical. However,
in the event to the
of a default
best
to of my creditors.
private knowledge,However,
the cyclicality of multilateral
if countries banks’
default to lending (notinstitution,
the multilateral of IMF lending,
they
which
face In order
has
full to widely
been reproduce
financial autarky. the
The facts
covered) fact shown
and that
how it in this with
relates
countries section,
can I include
the cyclicality
obtain within a DSGE
of private
multilateral funds debt
after
sovereign
has
defaulting default
only been model
approached
to private a in
lendersmultilateral
the thelender
empirical
reduces that offers
literature,
cost of loans
but as
default, inwith typically
nothighlighted
a DSGE lowerde-
bysovereign
Hatchondoin-
13
terest
fault
et rates (as
al. model.
(2017). Butlong
withas private
this debt
setting, is not
I show thatvery low), thatlending
multilateral imposes no conditionality
tends to be acyclical
and
or that is senior. acting
countercyclical, Also, this multilateral
as an insurance creditor doesfornot
mechanism penalizethat
countries countries
allowsafter
themthey
to
default
maintain tohigher
private
Additionally, inlenders
levels andmake
of total
order to continues offering
debt.seniority funding
relevant to them
in the in the
model, event of recovery
I introduce a default
to private
rates creditors.
for both types of However,
debt, whichif countries default
is a novelty totype
in this the of
multilateral institution,
models. When defaultsthey
to
faceThis
both full paper
financial
lenders occur, autarky.
is organized The
countriesas fact
follows:
must that
repay countries
Section can
2 provides
multilateral obtain multilateral
a general
lenders in full overview
before funds
of theafter
lit-
re-accessing,
defaulting
erature;
first to private
Section
multilateral, 3 and lenders
presents
second reduces
theprivate the cost4markets.
model;financial
Section ofshows
default,
the as
main
This highlighted
results ofby
assumption Hatchondo
thefull
of model as
repay-
et al.asto
well
ment (2017).
the calibrationlenders
multilateral and theisempirical
supportedevidence
by the supporting the findings;
empirical evidence, and Section
as shown above.5
concludes.
Furthermore, I also include positive recovery rates for private lenders to replicate what is
Additionally,
found in empiricalindata
order
andtoinmake
orderseniority relevant
to maintain in the model,
consistency betweenI the
introduce recovery
characteristics
rates for both and
of typesprivate
of debt, which is a novelty in this type of models. When defaults to
2 multilateral
A Review of lenders.
the Literature
both lenders occur, countries must repay multilateral lenders in full before re-accessing,
firstThanks
The multilateral,
canonical
to this and
new second
sovereign private
default
framework, modelsfinancial
I show ofthat markets.
Arellano
the This
(2008)
inclusion and
of assumption
Aguiar and
multilateral of full repay-
Gopinath
lenders pro-
14
ment higher
to do
multilateral lenders is and
supported
(2006)
duces not tackle
levels the different
of public debt types ofby
realistic the empirical
creditors
default evidence,
that a country
probabilities, aasdiscount
withmay shownnamely
have, above.
factor
Furthermore, I alsocreditors. 15
include positive recovery rates for private
official
that and private Nevertheless, the literature onlenders to replicate
the effect
12 is relatively high in sovereign default models. Furthermore, this paper contributes
of officialwhat
lend-is
Horn et al. (2021) distinguish among several types of official financing according to their objective,
such as “economic
found in development”
empirical hasand
data and in “financial
orderoftomultilateral
ing on sovereign default quite rescue”
inloans
maintain which they define
consistency as
between follows:
it“The
hasItcategory
the characteristics
to the existing literature on the roledeveloped recent
debtyears, even
in emerging though
economies.
economic development includes loans and grants extended for the financing of projects in developing
mainly
is well
of multilateral
focused
countries
established on bailout
ranging
in the andliterature
from private
loans fromlenders.
infrastructure international
that investments
private debttoinstitutions.
state-building
tends to beactivities.
procyclical.[...] financial
However, rescuetoloans
the
covers loans, grants and guarantees during currency, debt and banking crises, including balance-of-
payment
best of my crises, as well as general
knowledge, budget support”
the cyclicality (Horn et al.,
of multilateral 2021, lending
banks’ p. 14). (not of IMF lending,
13
Many authors, such as Boz (2011) or Fink and Scholl (2016) among others, include conditionality in
which
their
Thanks
One of the
has
models
to most
been this
widely
for bailout
new framework,
influential
covered)
loans, and evenpapers
and I show
how
though itthat
in this the of
strand
relates
conditionality
inclusion
isthe
withnotthe
of multilateral
literature,
cyclicality
present in most of lenders
Bozmultilateral
(2011),
private pro-
models
debt
loans,
itduces
mighthigher
be included
levels asofapublic
featuredebt of thisandmodel. In principle,
realistic default conditionality would
probabilities, amake multilateral
an
haseconomy
funds only been
relatively
that may
approached
less
borrow
attractive. in
from
the
However,
private
empirical lenders
the overallliterature,
and from
but
general equilibrium notan a with
inInternational
effects DSGE discount
sovereign
of conditionality
factor
Financialde-
would
depend
Institution on the(IFI)
different
which modeling choices of
represents such conditionality andisitsnon-defaultable
calibration.
fault 12
Horn
model. et al.But
(2021)
with distinguish
this amongIthe
setting, showIMF.
several types
that IFI’s debt
of official
multilateral financing
lendingaccording
tends to as
be aacyclical
totheir way of
objective,
such as “economic development” and “financial rescue” loans which they define as follows: “The category
capturing
oreconomic seniority.acting
countercyclical,
development To account
includes as loans for
andthe
an insurance conditionality
grants mechanism
9extended for forimposed
the countries by the
financing ofthat IMF,
allows
projects ifin countries
them to
developing
countries ranging from infrastructure investments to state-building activities. [...] financial rescue loans
decide
maintain to higher
borrowlevelsfrom thetotal IFI, debt.
they switch to a higher discount factor, since this involves
covers loans, grants and of guarantees during currency, debt and banking crises, including balance-of-
payment crises, as well as general budget support” (Horn et al., 2021, p. 14).
13
14 Manythough
Even authors, such and
Aguiar as Boz (2011) or
Gopinath Finkincorporate
(2006) and Scholl (2016)
bailoutsamong
from an others, includeagent,
unmodeled conditionality in
these take
their
the formmodels
of for bailout
transfers ratherloans,
than and even though conditionality is not present in most multilateral loans,
loans.
This paper is organized as follows: Section 2 provides a general overview of the lit-
it 15
might be included
An important as a to
attempt feature
address of heterogeneous
this model. In principle,
lending conditionality
through would make
the lens of seniority, multilateral
but abstracting
funds
from relatively
official versusless attractive.
private However,
creditors, is the
Bolton overall
and general
Jeanne equilibrium
(2009).
erature; Section 3 presents the model; Section 4 shows the main results of the model They effects
consider of conditionality
two types would
of lenders,
as
depend
one withon the different
whom modeling choices
debt renegotiation of such
is possible andconditionality
another withand whomits calibration.
it is not. Bolton and Jeanne
well assomehow
(2009) the calibration and the
represent banks empirical
as creditors withevidence
whom debt supporting
renegotiation theisfindings;
possible, and andbondholders
Section 5
as disperse lenders for whom the coordination of a renegotiation process is difficult.
14
concludes.
BANCO DE ESPAÑA DOCUMENTO DE TRABAJO N.º 2301 9
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