Does IMF Conditionality Benefit Lenders?

Abstract

This paper assesses the benefits to private lenders from IMF participation and conditionality in rescheduling sovereign debt through the Paris Club. A benefit is defined as an increase in the expected value of rescheduled or new loan contracts via a reduction in the weighted probability of default. Default is defined as the accumulation of positive arrears in any period. Using a sample of 84 countries, of whom 56 rescheduled debts through the Paris Club, over the sample period 1977-87, we find that the immediate provision of IMF liquidity through various loan facilities does lower the probability of default by a significant amount. Using a simple model of interest spreads, this translates into an expected decrease in the average spread of between 155 and 179 basis points for a representative sovereign borrower. Borrowers who are in significant liquidity and insolvency trouble will experience larger reductions. The presence of IMF conditionality does not appear to significantly lower the probability of default based on loan facilities with differing degrees of conditionality attached. Hence the paper suggests that IMF liquidity is important to private lenders but IMF conditionality programs are not.