Sovereign Debt Workouts with the IMF as Delegated Monitor - A Common Agency Approach

Abstract

IMF programmes are frequently criticised for lacking focus and being ineffective in helping maintain private credit lines following a debt crisis. We develop a theoretical model to explore the interlinkages between result-based conditionality and creditor collective action problems. The model highlights the strategic interactions between official and private creditors, and clarifies some of the trade-offs that underpin the design of IMF programmes. We identify conditions under which official creditors are able to limit the efficiency losses generated by creditor non-cooperation and debtor moral hazard. The circumstances under which official lending is able to catalyse private sector finance are also analysed.