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The forgotten lender: the role of multilateral lenders in sovereign debt and default

Author

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  • María Bru Muñoz

    (Banco de España)

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.

Suggested Citation

  • María Bru Muñoz, 2023. "The forgotten lender: the role of multilateral lenders in sovereign debt and default," Working Papers 2301, Banco de España.
    • Handle: RePEc:bde:wpaper:2301
    DOI: https://doi.org/10.53479/25026
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    References listed on IDEAS

    as
    1. Cordella, Tito & Powell, Andrew, 2021. "Preferred and non-preferred creditors," Journal of International Economics, Elsevier, vol. 132(C).
    2. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    3. Patrick Bolton & Olivier Jeanne, 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 879-902.
    4. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.
    5. Eduardo Levy Yeyati, 2009. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Open Economies Review, Springer, vol. 20(4), pages 489-507, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    sovereign debt and default; IFIs; multilateral institutions; seniority; consumption smoothing; emerging markets;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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