Seniority in International Markets: The Case of the IMF

Abstract

The IMF is a preferred creditor. Introducing this in the analysis gives that too much rescuing in the future would lead to too little borrowing in the present, which is the contrary to the standard moral hazard critique. Ex-post, an IMF intervention always make the country better off. However, IMF interventions make existing creditors worse off when the country solvency and liquidity situation is either good or weak and make them better off when it is in an intermediate range. This is consistent with the empirical evidence. The possibility of a future senior intervention can make the country ex-ante better off by preventing inefficient liquidation. However, although such an intervention always makes the country ex-post better off, it might actually hurt the country ex-ante. In this case the country would be ex-ante better off by committing today not to borrow from the IMF in the future, although this promise is not time consistent.