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Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum

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  • Sven Steinkamp
  • Frank Westermann

Abstract

During Europe's sovereign debt crisis, interest rate spreads have been highly correlated with the share of multilateral loans that were considered senior to private markets. As both variables are potentially endogenous, we follow 2 different approaches to analyze the direction of causality. First, we use a set of instrumental variable regressions where the differences between sovereign ratings serve as instruments. Second, we analyze a new panel survey dataset on seniority and interest rate expectations. In both approaches, we find evidence for the seniority conundrum, that is, a positive impact of multilateral loans on interest rate spreads.

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  • Sven Steinkamp & Frank Westermann, 2017. "Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 169-178, April.
    • Handle: RePEc:wly:ijfiec:v:22:y:2017:i:2:p:169-178
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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