MRP Draft (Final) - Michael VIRONE - 500843815 - 10-09-2018

IMF LENDING AND MORAL HAZARD: AN EXAMINATION OF DEBT MATURITY
by
Michael Gianni Virone

BA, Concordia University, 2017
A MRP
presented to Ryerson University
in partial fulfillment of the
requirements for the degree of
Master of Arts
In the Program of
International Economics and Finance
Toronto, Ontario, Canada, 2018
©Michael Gianni Virone, 2018

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ii
IMF LENDING AND MORAL HAZARD: AN EXAMINATION OF DEBT MATURITY
Michael Gianni Virone

Master of Arts in International Economics and Finance
Ryerson University, 2018
ABSTRACT
This paper addresses whether financial assistance provided by the International Monetary
Fund (IMF) creates moral hazard among international lenders, and examines how this
lending behaviour differs before and after a major financial crisis. IMF lending programs
examined in this study are the Stand-by Arrangement (SBA), Extended Fund Facility (EFF),
and Extended Credit Facility (ECF). We hypothesize that IMF-induced moral hazard effects
persist and are heightened by major crises. Moral hazard is measured by regressing relative
short-term sovereign debt on its determinants and on agreed-upon IMF credit. We find that
moral hazard occurred following the 1990s financial crises, but this lending behaviour was
not significantly present before and after the 2008 financial crisis. We attribute these
contradictory findings to the gradual reduction in size and occurrences of IMF bailouts. This
likely dissuaded foreign investors from lending imprudently in anticipation of rescue
packages or program extensions.
iii
Acknowledgements
I would like to thank my supervisor, Dr. Thomas Barbiero, for his invaluable guidance and
support throughout the process of writing this Master’s research paper. I dedicate this paper to
my parents, who have supported me throughout my academic career. Their relentless
encouragement has enabled me to pursue this degree.
iv
Table of Contents
1. Introduction .......................................................................................................................................... 1
2. Literature review................................................................................................................................... 3
3. Methodology....................................................................................................................................... 13
4. The data .............................................................................................................................................. 17
5. Results ................................................................................................................................................. 19
TABLE 1: Total Lending Arrangements .................................................................................................... 27
TABLE 2: SBA Lending Arrangements...................................................................................................... 28
TABLE 3: EFF Lending Arrangements ...................................................................................................... 28
TABLE 4: ECF Lending Arrangements ...................................................................................................... 29
TABLE 5: Total Lending Arrangements (with real exchange rate changes) ............................................ 30
TABLE 6: SBA Lending Arrangements (with real exchange rate changes) .............................................. 30
TABLE 7: EFF Lending Arrangements (with real exchange rate changes) ............................................... 31
TABLE 8: ECF Lending Arrangements (with real exchange rate changes) .............................................. 32
TABLE 9: Total Lending Arrangements Robustness Test (1997-2014) .................................................... 32
TABLE 10: Total Lending Arrangements Robustness Test (1997-2002) .................................................. 33
TABLE 12: SBA Lending Arrangements Robustness Test (1997-2014).................................................... 34
TABLE 13: EFF Lending Arrangements Robustness Test (1997-2014) .................................................... 35
6. Discussion............................................................................................................................................ 36
7. Conclusion ........................................................................................................................................... 42
Appendix A .................................................................................................................................................. 44
Appendix B .................................................................................................................................................. 45
References .................................................................................................................................................. 46
v
List of Tables
TABLE 1: Total Lending Arrangements .................................................................................................... 27
TABLE 2: SBA Lending Arrangements ..................................................................................................... 28
TABLE 3: EFF Lending Arrangements ...................................................................................................... 28
TABLE 4: ECF Lending Arrangements ..................................................................................................... 29
TABLE 5: Total Lending Arrangements (with real exchange rate changes) .............................................. 30
TABLE 6: SBA Lending Arrangements (with real exchange rate changes) .............................................. 30
TABLE 7: EFF Lending Arrangements (with real exchange rate changes) ............................................... 31
TABLE 8: ECF Lending Arrangements (with real exchange rate changes) ............................................... 32
TABLE 9: Total Lending Arrangements Robustness Test (1997-2014) .................................................... 32
TABLE 12: SBA Lending Arrangements Robustness Test (1997-2014) ................................................... 34
TABLE 13: EFF Lending Arrangements Robustness Test (1997-2014) .................................................... 35
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1. Introduction
The occurrence of successive financial crises in the 1990s spurred concern and curiosity over the
relationship between international debt maturities and downturns. Notable events, such as the
1994 Mexican, 1997 Asian, and 1998 Russian crises were largely the result of poor policy
reforms, political uncertainty, and misguided lending practices. It is widely accepted that the
effects of such events were greatly amplified by the overabundant accumulation of short-term
sovereign debt relative to total reserves, which led to capital flow reversals, current account
deficits and sovereign default (see Radelet and Sachs, 1998; Rodrick and Valasco, 1999; Shen,
2018).
To help prevent these financial crises, the IMF distributed generous credit arrangements to
the affected countries, conditional to the implementation of macroeconomic policies proposed by
the Fund. Skeptics believed that these measures would multiply the occurrence of future crises
by causing an overreliance on Fund assistance among borrowing nations, whereas the Fund
viewed it as a viable way of attracting foreign investment and providing liquidity benefits, whilst
imposing policy reforms. More specifically, opponents of IMF bailouts maintain that proposed
policy measures are not effective, borrowers do not use funds for their intended purposes, and
foreign creditors lend imprudently to countries that are most likely to receive financial support.
This paper investigates the last hypothesis commonly referred to as creditor-side moral hazard.
Moral hazard can be broadly defined as one party’s conscious decision to behave in a self-
serving fashion when being shielded from the negative effects. IMF-induced moral hazard can
occur from the borrower or lender side. Debtor side moral hazard occurs when Fund recipients
use their borrowed funds without intentions of obeying program conditionality because the
penalties of doing so do not outweigh the benefits. This paper specifically examines the lender
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side moral hazard. This occurs when international creditors lend more to countries expected to
receive IMF assistance, and at rates and maturities that do not reflect default risks. In brief, IMF-
induced moral hazard implies that Fund arrangements encourage imprudent borrowing or
lending behaviours due to the insurance against risk it provides to participating countries, which
in turn may heighten the degree or likelihood of a future financial crisis.
Measuring creditor moral hazard is an important policy assessment because its presence
insinuates that IMF bailouts generate a dead-weight-loss, and causes resources to be redistributed
away from tax-payers toward foreign creditors (Noy, 2008). It is also an important empirical
question that concerns international financial assistance programs in general. The existence of
moral hazard undermines an assistance program’s effectiveness in averting or resolving a
financial crisis, and may even heighten the impact and likelihood of a future crisis. The dilemma,
however, is that lender-side moral hazard provides struggling economies with short-run liquidity
benefits that can postpone imminent financial crises. It is thus more difficult to accurately
evaluate the harmful effects brought about by moral hazard.
Nonetheless, this dilemma is beyond the scope of our study which exclusively focuses on
observable changes in international lending behaviour induced by IMF lending in the immediate
short-run. We do so by estimating how international debt maturities react to expectations of
future bailouts. Hence, this paper only focusses on the negative effects brought about by lender
moral hazard, and dismisses the temporary liquidity benefits it may create in subsequent periods.
We find that IMF lending can create moral hazard effects that vary across lending programs,
recipient countries, and time.
The remainder of this paper is organized as follows: First, a literature review will discuss
previous empirical findings on the determinants of sovereign debt maturities, and on the catalytic
2
and moral hazard effects, which will set the stage for our research topic. Next, we will describe
our empirical model, and extensively discuss our selected variables. We will then state our model
results, discuss their empirical implications, and compare them to the related literature. This paper
will be concluded with a summary of our findings, and by suggesting the possible scope for future
research.
2. Literature review
The following section will discuss empirical studies on the determinants of debt maturity, IMF-
lending-induced moral hazard, and Fund catalysis. It should become clearer as to how these three
topics are intertwined, and how they influence the direction of our empirical study. We must first
investigate debt maturities to set the stage for our topic.
2.1 Debt Maturities and Financial Crises
Financial crises within developing countries were widespread throughout the 1990s.
Although these crises were the result of several differing factors, many believe that an
overabundant accumulation of short-term debt greatly amplified capital flight and debt reversals.
Shen (2018) supports this popular view by studying the relationship between international debt
maturity and the likelihood of financial crisis. The author’s calibration model demonstrates that
the probability of financial crisis and debt maturity are negatively related. More specifically, the
probability of crisis is 1.96 percent when only one-period bonds are included in their model,
whereas it measures 1.01 percent when the bond maturity is increased from one quarter to eight
quarters. Likewise, it falls to 0.56 percent when twelve period bonds are exclusively issued.
These findings are also supported by Radelet and Sachs (1998), and Rodrick and Velasco (1999).
Moreover, the related literature demonstrates consistent findings with regards to the
determinants of sovereign debt maturities. A wide body of evidence suggests that economic and
3
non-economic related uncertainties tend to increase the proportion of short-term debt maturities.
Valev (2007) investigates this empirical finding by treating output volatility and foreign reserves
as proxies for economic uncertainty, and by measuring non-economic uncertainty through the
rule of law and quality of bureaucracy indices. The author’s findings show that short-term debt
as a proportion of total debt and the proxy variables for non-economic uncertainty are positively
and significantly related. The proportion of short-term debt is also positively associated with
economic uncertainty, but only for very high levels of volatility.
Mina and Martinez-Vazquez (2006) support Valev’s results regarding non-economic
uncertainty effects by examining how contract enforcement and institutional stability influence
the maturity and level of international debt. They found that an “improvement in contract
enforcement and institutional stability lengthen the maturity of debt” (Mina and Martinez-
Vazquez, 2006, p.20). Additionally, Bussiere et. al (2006) also found evidence for the economic-
related uncertainty effect by noting that higher exchange rate volatility leads to the accumulation
of short-term debt within emerging economies.
An important empirical question to investigate is why some less developed countries undergo
periods of excessive short-term debt accumulation, despite its statistical association with crises.
It is widely believed that both international lenders and borrowers prefer short-term exposure
when a crisis seems imminent. It is believed that international lenders prefer to distribute loans
with shorter maturities when expectations of default or a crisis are high, so they can easily pull-
out while limiting their potential losses (Valev, 2007). More specifically, lenders can effectively
monitor borrowers by issuing short-term loans, as this allows lenders to receive quick repayment
if they fear borrowers will default (Chang, Wee, and Yi, 2012). Hence, lenders sell long-term
bonds at a higher risk premium to economies facing uncertainties, and therefore emerging
4
economies can borrow short-term loans at relatively lower interest rates (Broner, Schmukler, and
Lorenzoni, 2013). Ironically, the accumulation of short-term debt in anticipation of a crisis
equally seems to amplify its effects since lenders become less willing to rollover risky loans at
low rates, which increases the probability of default (Broner et al., 2013). Shen (2018) and
Bengui (2011) explain how accumulating long-term debt creates insurance benefits against
adverse shocks as it provides longer lasting liquidity to borrowers facing risks of future turmoil.
Market uncertainty is not the sole determinant of debt maturity. The literature also supports
the view that economies with stronger fundamentals are more inclined to accumulate less costly
and more manageable short-term debt, as they are less susceptible to liquidity crises. Given that
long-term bonds are more expensive and provide insurance benefits against negative shocks, it is
easy to understand why countries with stronger economic fundamentals prefer narrower
maturities because they are better capable of averting crisis and rolling over short-term debt. As
highlighted by Martinez-Vazquez and Mina (2006), short-term debt is positively correlated with
real GDP per capita, private sector credit as a percentage of GDP, and imports, which are proxies
for economic development, financial development, and openness to trade respectively. These
results are strongly supported by Valev (2007), Buch and Lusinyan (2003), and Rodrik and
Velasco (1999).
2.2 Catalytic Effect
It has been widely debated whether IMF programs create a positive catalytic effect. This
effect can be broadly defined as the ability of IMF programs to stimulate capital inflows within
participating countries by signaling to foreign investors the presence of improved liquidity
standings, the willingness and commitment to undergo economic reform, as well as the
heightened possibility of bailouts. However, catalysis can occur in both directions. IMF lending
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can cause negative catalysis as well, which occurs when sovereign lenders view a bailout as an
indicator for a country’s weak economic standing. Moreover, a recipient country’s failure to
follow Fund conditionality may contribute to negative catalysis through capital flight.
Proponents of the IMF maintain that the benefits associated with heightened capital inflows and
liquidity outweigh the negative effects that occur when the expectation of future or imminent
bailouts encourages imprudent lending and fund usage. Conversely, opponents of this
organization argue that the moral hazard effect outweighs the benefits of catalysis, or rather that
IMF lending programs depress capital inflows altogether as it indicates that a country is
undergoing financial distress.
Earlier studies overwhelmingly find no presence of positive catalysis. Edwards (2006)
suggests that the most prominent catalytic effects should be found when analysing the private
sector, as opposed to the public sector. Thus, they analyse the effects of IMF agreements on
portfolio investment levels to assess the degree and direction of catalysis. By comparing
countries that received IMF assistance to those that have not, their model fails to find evidence
for positive catalytic effects even after controlling for selection bias. Rather, supported members
experience capital flight. They additionally note that recipient countries are not rewarded with
capital inflows when they successfully implement program conditions and are punished even
more for poor implementation. These findings contradict the commitment and signaling effect
hypotheses.
In a similar study, Diaz-Cassou and Garcia-Herraro (2006) find more optimistic results. Their
model demonstrates that although IMF crisis-resolution arrangements seem to detract foreign
direct investment, precautionary arrangements are directly related to inflows. This is to say that
program duration has a positive effect on the degree of capital inflows, as crisis-resolution
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arrangements tend to be short-lasting, whereas precautionary ones tend to persist for longer
periods. Furthermore, an increase in program size stimulates foreign direct investment (FDI)
inflows, perhaps because greater liquidity levels provide investors with more assurance that a
default will not occur.
Recent work, however, indicate that IMF lending can produce positive catalytic effects under
certain circumstances. It is commonly observed that countries demonstrating greater levels of
commitment towards program conditionality benefit the most from catalysis. Moreover, the
degree of catalysis differs greatly across programs. Lastly, countries with stronger economic
fundamentals seem to experience the strongest short-run signaling effects.
By defining countries that do not restructure their debt as solvent, and those that do as
insolvent, Van der Veer and de Jong (2010) show that the former subgroup of countries benefits
from Stand-By Arrangements (SBAs), but not from Extended Fund Facilities (EFFs) when using
U.S. aid as an instrument for capital flows. Insolvent economies on average did not display any
evidence for catalysis for either arrangement. Arabaci and Ecer (2014) offer an alternative way
of measuring the catalytic effect by analysing the maturity of public debt, as opposed to
evaluating the effects on bond spreads or directly on the degree of capital flows. They also
measure the signaling effect by investigating “the response of financial markets to an IMF
[program] rather than to its implementation” (Arabaci and Ecer, 2014, p.1576). When accounting
for all the countries in their model, they “find that signing an agreement with the IMF
significantly improves the terms of debt, which implies an improvement in access to
international capital markets” (p. 1583). More notably, the positive signaling effect is lowest for
the sample group that includes all countries, and becomes incrementally larger for subsamples
consisting of economies with stronger economic fundamentals.
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Sundac and Andrijic (2016) investigate whether strong commitment towards IMF reform
attracts foreign direct investment in Central and Southeastern Europe. They characterize
countries who sign Stand-by Arrangements (SBAs), Extended Credit Facilities (ECFs), and/or
Extended Fund Facilities (EFFs), as possessing higher, lower and mixed levels of credible
commitment to IMF arrangements respectively. As in the other bodies of research, SBAs
demonstrate positive catalytic effects, while ECF and EFF arrangements yield negative effects
on foreign direct investments. Thus, positive catalytic effects may arise when borrowing
countries can more credibly commit to proposed reforms. Bauer, Cruz and Graham (2012) lend
support to these findings by noting that democracies are more likely than autarkies to experience
positive catalytic effects as they are better able to signal credible implementation of IMF
policies.
2.3 Moral Hazard
Moral hazard stemming from IMF lending must be clearly distinguished from the catalytic
effect. As was explained earlier in this paper, moral hazard when applied to the IMF implies that
its lending encourages imprudent borrowing or lending behaviours due to the insurance it
provides to participating countries, which in turn may heighten the degree or likelihood of a
financial crisis. The creditor-side moral hazard effect differs from the catalytic effect in two
ways. Firstly, moral hazard by lenders precedes IMF arrangement announcements in anticipation
of a bailout, whereas catalysis can occur before and/or after such announcements. Secondly,
creditor moral hazard is measured by the response of international lenders to changes in the
likelihood of future IMF bailouts, as opposed to changes in borrowing-country fundamentals or
intentions. Similarly, borrower moral hazard arises when debtor countries receiving fund
assistance use IMF credit in an unintended manner. It can also arise when borrowers send
8
misleading commitment signals to the IMF and foreign investors to stimulate credit inflows
without any intentions of imposing proposed policy measures. Although, this form of moral
hazard is theoretically more complicated to measure because it can only be examined based on a
country’s behaviour in response to receiving Fund arrangements, which can stem from several
indistinguishable motives.
Research on investor-side moral hazard yield inconclusive results and employ various forms
of methodologies. Lee and Shin (2008) investigate the presence of investor moral hazard by
empirically examining whether the anticipation of IMF bailouts cause debt spreads to narrow. A
tightening of debt spreads entails a convergence between risk-free rates and sovereign lending
rates, which can also be interpreted as a reduction in perceived lending risks. They strengthen the
interpretability of their results by analysing effects before and after the 1998 Russian financial
crisis, which was not followed by an expected Fund bailout. Thus, theory states that moral
hazard effects should have been stronger before the crisis. Their overall evidence indicates that
investor moral hazard prevailed, as “bond spreads of a country which [was] more likely to be
bailed out by the IMF tend[ed] to be less responsive to the country fundamentals” (Lee and Shin,
2008, p.827). Almost identical results are found before and after the Russian crisis, suggesting
that this event did not discourage imprudent lending as hypothesized. Despite these pessimistic
results, Lee and Shin (2008) emphasize that moral hazard is not a significant issue if lending
programs substantially shield a country from balance of payment reversals or from liquidity
crises.
Conversely, Noy (2008) illustrates differing results while using a similar approach. It
assesses whether the major bailouts in response to the 1994 Mexican financial crisis changed
creditor perceptions on risk. It is assumed that although bond spreads reflect investors’ perceived
9
level of risk, they are determined entirely by what is observable to such investors who possess
perfect foresight. Therefore, bond spreads are regressed on its determinants, and the estimated
residual term is treated as the moral hazard effect. The average error term is positive across
countries, indicating no presence of moral hazard because bond spreads were higher than
expected during the post-crisis period. Their model yields similar outcomes when excluding the
perfect foresight assumption. In sum, the large bailouts in response to the widespread 1990s
financial crises failed to generate an additional moral hazard effect, or alternatively, moral
hazard was minimized by a worsening global outlook for which is not controlled for.
Moreover, Mina and Martinez-Vazquez (2002) offer an alternative way of analysing creditor
moral hazard by treating debt maturity instead of spreads as a proxy for perceived risk levels.
They treat the disbursement of credit tranches as a proxy for the commitment effect by
forwarding this variable one period ahead. This paper similarly treats the agreed amount of
program credit as a percentage of GDP as a proxy for the creditor moral hazard effect by
forwarding this variable one period ahead. Lastly, it differs from Noy (2008) by separating the
effects induced by SBAs, EFFs and Enhanced Structural Adjustment Facilities (ESAFs) before
and after the 1994 Mexican peso crisis. When total program credit is analysed, moral hazard was
only found to occur after the crisis. Moreover, effects were present for SBAs in both periods, but
was noticeably more pronounced in the post-crisis period. Although, EFFs only seemed to have
resulted in imprudent lending behaviours after the crisis, and no significant moral hazard effects
were noted for ESAFs.
It is evident from these findings that Fund lending encourages creditor moral hazard to
varying extents. Lee and Shin (2008) do not find evidence to support the notion that moral
hazard effects change after the realization of a crisis. It is conversely noted by Noy (2008) that
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while this lending behaviour occurs in pre- and post-crisis periods, moral hazard is accentuated
before the event of a crisis. This is opposed by the heightened post-crisis effects found in Mina
and Martinez-Vazquez (2002). The analysis of different crises is one possibility as to why these
results differ. For instance, Mina and Martinez-Vazquez, and Noy analyse the 1994 Mexican
peso crisis, while Lee and Shin focus on the 1998 Russian financial crisis. However, the way
moral hazard is measured may clarify why Noy’s, and Mina and Martinez-Vazquez’s findings
are at odds. While Noy specifies bond-spreads as a proxy for lender risk perceptions, such
perceptions are proxied by sovereign debt maturities in Mina and Martinez-Vazquez. Lastly,
estimated moral hazard effects vary across Fund programs, and are strongest for SBAs.
The literature related to borrower moral hazard is more conclusive, however. Although,
findings can differ depending on how this behaviour is measured and interpreted. Gai and Taylor
(2004) examine “how the demand for IMF resources (as realized through participation in IMF
programs) differs before and after the change in lending practices through the introduction of
SRF and NAB” (p.395). The probability of Fund assistance is estimated and regressed on short-
term debt, GDP growth and various liquidity variables as a base model before implementation of
SRF and NAB. Structural changes in the base model that occur after policy implementations can
be interpreted as a change in participation incentives, which would support the debtor moral
hazard hypothesis. Their regressions demonstrate that changes in debtor demand incentives did
occur, and the probability of IMF participation increased as well. However, these findings can be
interpreted differently if it is assumed that these new policies were viewed by countries as more
effective in dealing with real hazard, which consequently changed their borrowing incentives.
Dreher and Vaubel (2004) conclude that debtor moral hazard occurs as well when they
compare pre- and post-election policy measures employed by Fund recipients. Their regression
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results demonstrate two trends indicating the presence of debtor moral hazard. Firstly, Fund
recipients experience significantly higher relative government budget deficits and monetary
growth within the eighteen months preceding a national election. Secondly, the exhaustion of
IMF quotas within the same time frame causes budget deficits and monetary growth rates to
significantly decrease as well. Such results can be interpreted as the use of IMF credit to
facilitate temporary expansionary fiscal and monetary policy reform to sway voter support.
Moreover, fiscal and monetary contractionary practices employed by recipient governments after
a national election implies that they “may wish to use IMF (…) conditionality as a scapegoat for
unpopular corrective measures that are now required” (Dreher and Vaubel, 2004, p.7).
Much attention has also recently been placed on the moral hazard effects caused by a
country’s degree of interdependence with the United States. Chapman et al. (2015) describe
countries that hold stronger ties with the U.S. as more globally influential. They hypothesize that
more influential countries face shorter and more lenient punishments when they don’t comply
with IMF conditionality. Therefore, greater incentives exist for such borrowing countries to
renege on their IMF policy commitments. Political bias is found to have a positive and
significant effect on bond yields among important debtors, as investors charge higher risk
premiums to Fund members who more frequently renege on their obligations.
Despite the large body of evidence supporting the existence of Fund-induced borrower moral
hazard, Bas and Stone (2014) attempt to disprove the notion that long-term use of IMF resources
causes borrower moral hazard by creating harmful patterns of dependency. When controlling for
adverse selection bias, their results indeed counter this notion. Repeat users experience greater
growth gains relative to counterfactual estimates, which implies that IMF lending does not create
borrower moral hazard incentives in the long-run.
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This body of literature overwhelmingly supports the notion that IMF lending leads to
borrower moral hazard in the immediate short-run. The degree of moral hazard varies depending
on political bias, changes in IMF policy measures, and a recipient country’s political incentives.
Nonetheless, Bas and Stone (2014) do not find evidence for moral hazard in the long-run.
However, they fail to acknowledge that repeat fund recipients are more committed to program
reform relative to those who fail to receive Fund extensions. Higher growth rates among repeat
users may be attributable to commitment levels, and thus does not necessarily indicate the
absence of moral hazard.
3. Methodology
As this paper tests for the presence of IMF induced moral hazard on the creditor side, we
estimate the effects of expected IMF lending arrangements on short-term external debt as a
percentage of total external debt before and after the recent global financial crisis. The
subsample period prior to the crisis takes place between 2001 and 2007, and the post-crisis
subsample is set between 2009 and 2015. If moral hazard is present, we expect the magnitude of
this effect to be more pronounced after the crisis because we assume that international lenders
anticipate larger and more frequent bailouts after an event that causes financial and economic
uncertainties. We choose to measure hazard through the analysis of public debt maturities
because the accumulation of short-term debt is found to be associated with increased economic
and non-economic related uncertainty. We can therefore interpret an increased issuance of
relative long-term debt in anticipation of a Fund bailout as a decrease in perceived risk by
lenders. In other words, this would imply that international creditors lend imprudently by
viewing IMF programs as insurance against risky investments. The implicit assumption is that
13
without IMF guarantees, fewer creditors would lend funds to countries experiencing financial
difficulties.
We estimate the following balanced panel data regression, which builds on Mina and
Martinez-Vazquez (2002):
𝑆𝑇𝐷𝐹𝑇𝐸𝐷𝐹𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐼𝑇𝐻𝐷𝑅𝐴𝑊𝑁𝑖,𝑡+1 + 𝛽2 𝐼𝑀𝐹𝑃𝑅𝑂𝐺𝑖,𝑡+1 + 𝛽3 𝑅𝐸𝑆𝑇𝐷𝑖,𝑡−1
+ 𝛽4 𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁𝑖,𝑡+1 + 𝛽5 𝑇𝐸𝐷𝐺𝐷𝑃𝑖,𝑡−1 + 𝛽6 𝐼𝑀𝑃𝐺𝐷𝑃𝑖𝑡 + 𝛽7 𝐺𝐷𝑃𝐶𝐴𝑃𝐺𝑅𝑖,𝑡−1
+ 𝛽8 𝐶𝑅𝐸𝐷𝐼𝑇𝑖,𝑡−1 + 𝛽9 𝐷𝐸𝑉𝐴𝐿𝑈𝐸𝑖,𝑡+1 + 𝛽10 𝐺𝐷𝑃𝐶𝐴𝑃𝑖,𝑡−1 + 𝛽11 𝐼𝑁𝑆𝑇𝐶𝐻𝑁𝐺𝑖,𝑡−1
+ 𝑢𝑖𝑡
The dependent variable STDFTEDF is short-term external debt as a percentage of total external
debt. WITHDRAWN is the percentage of agreed IMF credit arrangements that is withdrawn,
which is a proxy for the commitment effect. IMFPROG is the total agreed IMF credit amount as
a percentage of GDP, which is used to estimate the moral hazard effect. RESTD is foreign
reserves as a percentage total external debt, which measures a country’s level of resilience
against external and domestic shocks. INFLATION is CPI inflation and is a proxy for sound
macroeconomic policies. TEDGDP is total external debt as a percentage of GDP, and is an
estimate for the likelihood of default. IMPGDP is total level of imports as a percentage of GDP,
which is a proxy for openness to trade. GDPCAPGR is real GDP per capita growth, and is a
measure for output volatility. CREDIT is domestic credit that is transferred to the private sector
as a percentage of GDP, and accounts for the level of financial development. DEVALUE is the
percentage change in the nominal exchange rate, and is a proxy for debt restructuring and
international defaults. GDPCAP is real GDP per capita in 2010 US dollar terms, which
represents economic prosperity levels. Lastly, INSTCHNG is the Rule of Law index, and it
14
captures lenders’ risk perceptions on borrower default. More specifically, it is an index that
measures how effectively laws and contracts are obeyed and enforced.
The commitment effect is present if the coefficient for WITHDRAWN is negative and
significant. We interpret a percentage increase in fund withdrawals as the IMF’s approval of a
country’s efforts towards imposing conditionality measures. If the IMF does not deem a
participant’s intentions as sincere, for instance, the Fund would be hesitant to allow credit
withdrawals. Therefore, a negative coefficient value for WITHDRAWN entails that international
lenders expect Fund users to comply with conditionality. This is how we describe and measure
the commitment effect in our model. Similarly, the moral hazard effect persists if the coefficient
for IMFPROG is negative and significant. This can be interpreted as a reduction in perceived risk
among international lenders who expect borrowing countries to receive larger Fund bailouts in
future periods.
In addition to analysing the effects before and after the 2008 global financial crisis, we
separately analyse the effects caused by Stand-by Arrangement (SBA), Extended Credit Facility
(ECF) and Extended Fund Facility (EFF) programs. SBAs are intended to prevent short-term
liquidity or unsustainable credit imbalances, whereas ECFs and EFFs are intended to resolve
such difficulties over a more extensive period. Moreover, international debtors who participate in
SBAs tend to possess relatively stronger economic fundamentals, and as a result, are more
capable of signaling their intentions to commit to policy reforms. The opposite holds true for
those who borrow ECF and EFF funds because they are more likely to have weaker economic
fundamentals. For these reasons, we anticipate that the commitment effect is strongest for those
who receive SBAs.
15
The independent variables that represent economic uncertainty are RESTD, INFLATION,
TEDGDP, GDPCAPGR, and DEVALUE. As such, we expect the coefficients associated with
these variables to be positive because the literature demonstrates that lenders tend to provide debt
with shorter maturities when a country is prone to higher economic/financial uncertainty, and
equivalently is more likely to default on loans. This implies that RESTD, INFLATION,
TEDGDP, GDPCAPGR and DEVALUE are positively related to relative short-term sovereign
debt.
Conversely, INSTCHNG accounts for non-economic related uncertainty. Lower values for
this instrument indicate higher perceptions of default risk. Therefore, it should be negatively
related to relative sovereign debt maturities.
The independent variables that represent the strength of a country’s economic fundamentals
are IMPGDP, CREDIT, and GDPCAP. Since long-term bonds are relatively more expensive
than short-term bonds (see Shen, 2018; Broner, Schmukler and Lorenzini, 2013), and since more
developed countries are better capable of rolling over short-term debt, we expect such countries
to borrow relatively larger proportions of short-term debt. On the other hand, less developed
countries with weaker fundamentals are less capable of averting crisis and rolling over short-
term debt. It can likewise be assumed that less developed economies accumulate comparatively
more long-term debt since it provides an insurance benefit against unfavourable shocks (Shen,
2018; Bengui, 2011).
For these reasons, our proxies for financial and economic development should be positively
related to the dependent variable on average. Although, less advanced economies also tend to
attract proportionally more short-term debt when they are facing inevitable insolvency or a crisis
since it is less expensive to do so. This leads us to believe that development variables for SBA
16
regressions will possess positive coefficients because countries that receive funds from these
arrangements should be less likely to experience insolvency. Similarly, we expect these variables
to possess ambiguous coefficient signs for ECF and EFF regressions since participants who
receive funds from these arrangements are likely experiencing a crisis, and thus the least
developed countries among these participants may be tempted to borrow short-term loans,
whereas those with stronger fundamentals are more capable and inclined to resolve a crisis by
accumulating long-term debt.
4. The data
We construct a balanced panel dataset consisting of 67 countries that have received IMF
assistance at least once between 1997 and 2015. In comparison, Mina and Martinez-Vazquez’s
(2002) balanced panel dataset consists of 71 developing and emerging economies between 1992
and 1997. Our dataset size varies across subsample groups, which are specified based on
recipient type, and timeframe. Data was retrieved from the official World Bank and IMF
databases.
IMF lending data is gathered exclusively from the official IMF website database. Lending
arrangements are measured in thousands of special drawing rights (SDRs), and are segmented by
program type. This dataset also displays the agreed credit size, distribution and
expiration/cancelation dates of the arrangements, and undrawn credit. Since this data is only
available in monthly time-frequencies, it is converted into yearly data by calculating 12-month
averages for each sample year.
Conversely, the data used to construct the economic fundamentals and uncertainty proxies is
retrieved from the World Development Indicators (WDI) dataset, which can be found on the
official World Bank website. This dataset includes an extensive number of development
17
indicators for more than 150 economies. The Rule of Law index used to construct INSTCHNG is
retrieved from the Worldwide Governance Indicators (WGI) dataset, which can also be found on
the official World Bank website. Appendix A provides an overview on the methodologies and
data sources used to develop the dependent and explanatory variables.
The data possesses some limitations which must be addressed before proceeding to the
results. Firstly, the explanatory power of the fWITHDRAWN variable is hindered by the difficulty
to distinguish between canceled and expired IMF program arrangements. A program cancellation
implies that a recipient country is unable or unwilling to commit to stringent Fund conditionality,
while a program expiration infers that a recipient met conditionality. Thus, cancellations should
be directly associated with relative short-term international debt because lower commitment
towards economic reform increases default risks. Determining whether a program was cancelled
is therefore imperative because failing to do so overstates the estimated commitment effects
measured by fWITHDRAWN.
The variable fDEVALUE poses an additional limitation since it is measured in nominal terms
as opposed to real terms. Although we acknowledge that real exchange rate volatility is a
stronger determinant for relative public debt maturity, we refrain from using this measure due to
data restraints. Real exchange rates data is not available for many of our sample members, and
tends to be available for more developed economies. The use of nominal exchange rate changes
as a control variable is problematic because its direction of influence is ambiguous since lenders
react to real currency appreciations or depreciations. Moreover, currencies can undergo nominal
appreciations, whilst experiencing real depreciations, and vice-versa.
18
5. Results
The Hausman specification test is employed to determine whether a fixed-effects or random
effects panel data model is appropriate for each subsample group. The following results
demonstrate that the strength and significance of the moral hazard effect varies greatly between
subsample periods and program types. It is evident that this effect occurred sometime between
1997 and 2015, but was largely insignificant during the pre- and post-crisis periods. Estimated
moral hazard effects occurring between 1997-2015, 2001-2007 and 2009-2015 will first be
presented in this respective order. This will be followed by the control variable regression
results.
Table 1 presents the total sample regression estimates and illustrates that expectations of
future IMF program credit amounts relative to GDP increases long-term sovereign debt as a
proportion of total debt at the aggregate level. This is evident as the fIMFPROG variable is
statistically significant, and as its coefficient sign is negative. Likewise, countries expected to
receive EFF and ECF credit arrangements between 1997 and 2015 attracted sovereign lenders
with moral hazard incentives, whereas this was not the case for SBA members (see Table 2,
Table 3 and Table 4). With a coefficient value of -2.154, EFF lending seems to have influenced
moral hazard the most during this timeframe. The moral hazard effect experienced by ECF
members was considerably weaker, with a coefficient of -0.712.
The pre-crisis regression estimates demonstrate that creditor moral hazard was not notable
between 2001 and 2007 for every IMF lending program. Average sovereign debt maturities are
strongly independent from relative agreed-upon IMF credit arrangements in the pre-crisis EFF
and ECF regressions, indicating that these lending programs did not cause lender moral hazard.
19
Although, pre-crisis SBA lending caused negative moral hazard incentives at the 10%
confidence level.
The post-crisis subsample period findings are contrary to our prediction that effects were
larger after the recent financial crisis. They demonstrate that IMF induced moral hazard was not
created after 2008. Probability values for the fIMFPROG variable measure 0.473, 0.796, 0.249
and 0.817 for total arrangements, SBAs, EFFs and ECFs respectively. We attribute these
findings to the less frequent and smaller IMF bailouts that occurred after the crisis, which likely
dissuaded foreign investors from lending imprudently in anticipation of rescue packages or
program extensions.
The occurrence of lender moral hazard between 1997 and 2015 fails to explain why this
behaviour did not substantially occur during the pre- and post-crisis periods. However, most of
these effects seemingly occurred sometime after the 1994 Mexican, 1997 Asian, and 1998
Russian crises between 1997 and 2002. Table 1 illustrates that anticipated Fund bailouts or
program extensions reduced the inflows of relative short-term sovereign debt during 1997-2002.
Although this was not the case for SBA and ECF recipients (see Table 2 and Table 4), Table 3
demonstrates that EFF lending produced substantial moral hazard during this earlier period with
a coefficient of -2.915. It is also interesting to note that ECF and SBA arrangements caused
negative moral hazard effects, which opposes the total sample estimates. For these reasons, we
believe that the positive moral hazard estimates for total Fund arrangements illustrated in Table 1
are mostly attributable to EFF lending that arose between 1997 and 2002. The EFF regressions
further contradict our hypothesis as they demonstrate that moral hazard effects were substantially
stronger prior to 2008
20
With regards to the commitment effect, fWITHDRAWN is only negative and statistically
significant in the 2001-2007 SBA regression illustrated in Table 2. Positive commitment effects
were strongest for SBA lending between 2001 and 2007, with a p-value of 0.011 and a
coefficient of -0.100. EFF lending, on the other hand, caused negative commitment effects
during the pre- and post-crisis periods. Lastly, the commitment effect instrument is statistically
insignificant for ECF lending across all subsample periods. In sum, only SBA recipients that
were expected to commit to program conditionality during these periods were successful in
reducing lender risk perceptions, which likely contributed to heightened foreign investment
inflows. Aside from these two instances and contrary to our expectations, committed Fund
recipients tended not to benefit from the lengthening of debt maturities throughout 1997-2015.
Most of the economic development and uncertainty control variables that are statistically
significant possess the expected coefficient signs. Nonetheless, there are noticeably fewer
statistically significant estimated variables than we initially anticipated, especially in the pre- and
post-crisis regressions. The following will present the explanatory power of each control variable
across IMF program types and subsample periods.
There is a relationship between reserves as a proportion of sovereign debt, and relative short-
term debt. However, the direction of this relationship is unclear and varies across IMF program
types. The estimated lRESTD variable possesses explanatory strength with a positive coefficient
across the total sample period, while it is insignificant when the pre- and post-crisis periods are
separately analysed. The percentage of reserves proportional to total debt positively affects
relative short-term debt inflows among SBA recipients during the pre-crisis period and between
1997-2002, while this relationship is positive and negative for ECF receivers during the post-
crisis period and between 1997-2002 respectively. Contrarily, lRESTD is insignificant in the EFF
21
subsample regressions. These estimates fail to support our notion that the relationship between
lRESTD and STDFTEDF is strictly positive.
The income variables, lGDPCAP and lGDPCAPGR are very strong indicators that tend to be
positively related to STDFTEDF, but not for ECF participants between 1997 and 2002.
Although, these variables were directly related to the dependent variable for the latter subsample
group across 1997-2015. These findings largely support our hypothesis that more affluent
countries prefer comparatively shorter debt maturities.
Expectations of future inflation rates did not seem to be a strong indicator for sovereign debt
maturities. The fINFLATION variable is statistically significant at the 10% level for all
subsample groups. We argue that if current inflation rates within borrowing countries are not
excessively high, then an anticipated increase will signal favourable output prospects to lenders.
Contrarily, an anticipated increase will signal unfavourable output prospects if inflation rates are
already high, as this can viewed as political or economic instability.
Total external debt as a percentage of GDP is a strong indicator for all three types of IMF
credit arrangements when total sample-period data is regressed. The positive coefficient value
associated with lTEDGDP in the SBA and EFF regressions is consistent with our presumption
that greater proportions of public debt cause lender uncertainty, as it is associated with a
narrowing of maturities. In contrast, ECF members tend to experience a lengthening of debt
maturities as they accumulate debt relative to GDP. Although this variable is statistically
significant for every Fund program across the 1997-2015 sample period, it is largely insignificant
in the shorter subsample period regressions.
An expected future change in nominal exchange rates is a weak predictor for a borrowing
country’s external debt, as fDEVALUE is statistically significant for ECF lending between 1997-
22
2002, and it is negatively related to STDFTEDF in these instances. Moreover, this control
variable holds no explanatory power for SBA and EFF receivers, whereas it is positive and
significant for total lending arrangements between 1997-2002. These inconsistent results support
our presupposition that the coefficient sign for fDEVALUE is ambiguous. Lastly, the weak linear
relationship between devaluations and debt maturities is not surprising since nominal exchange
rates are constant under fixed regimes. As explained in the previous section, such ambiguity may
not occur if anticipated changes in real exchange rates are measured instead.
Private credit as a fraction of GDP is positively related to sovereign debt maturity for SBA
and ECF members. There is, however, no notable relationship between lCREDIT and
STDFTEDF for EFF members regardless of timeframe. The positive relationship between
lCREDIT and STDFTEDF is in line with our prediction that economies with more developed
financial institutions borrow proportionally more short-term debt.
Imports as a fraction of GDP is a strong predictor for sovereign debt maturities, particularly
after 2001. Earlier in this paper, we argued that imports as a percentage of GDP is a proxy for a
country’s level of openness to international markets. Hence, we assume that the IMPORTS
variable is positively associated with the dependent variable. This instrument is not lagged
because imported goods and services tend to be financed in the short-run. Therefore, a change in
the relative value of imports should immediately be followed by a shortening of sovereign debt
maturities. Our prediction is reinforced by the results, as IMPORTS and STDFTEDF tend to be
directly related. Although, this is not the case for ECF recipients between 1997 and 2015.
Lastly, the explanatory strength of the Rule of Law index varies across subsample periods.
For total arrangements, lINSTCHNG is negatively related to relative debt maturities between
1997-2002 at the 10% significance level. Its coefficient is also negative in the post-crisis EFF
23
and 1997-2002 ECF regressions at the 5% significance level. These estimates support our notion
that improvements in the enforceability of laws and contracts reduces expectations of debt
default.
We address the issues associated with the fINFLATION and fDEVALUE variables by
regressing relative short-term debt on inflation volatility and real exchange rate changes instead.
We viewed future inflation volatility as a better estimator for sovereign debt maturities compared
to the inflation rate. However, this variable was ultimately omitted due to its weak explanatory
power. Real exchange rates are log-differenced and are led one period ahead. This measure is
represented by LNfDEVALUE. Since the exchange rates are expressed as the level of domestic
currency relative to a weighted average of foreign currencies, a positive value for LNfDEVALUE
indicates a real currency devaluation or depreciation. Hence, this variable is expected to be
positively associated with relative short-term debt.
When IMF programs are not separately analysed, LNfDEVALUE tends to negatively affect
STDFTEDF, but possesses no statistical power in the pre-crisis regression (see Table 5).
Recipient types are separately analysed between 1997 and 2015 exclusively since the other
subsample periods yield insufficiently large sample sizes. Unlike the previous regressions,
LNfDEVALUE is not statistically significant across all three program types (see Table 6, Table 7,
and Table 8). We can infer that future real currency devaluation/depreciation within IMF
recipient countries were not unfavourably viewed by foreign creditors. This unexpected outcome
leads us to believe that investors are not capable of foreseeing real exchange rate changes one
year ahead of time, as economic theory would suggest. Another possibility is that investors place
greater importance on the value of currencies relative to the US dollar, as opposed to against a
weighted average of foreign currencies. Nonetheless, these regression estimates demonstrate
24
once more that lender moral hazard was strongest within economies receiving EFF
arrangements. This can be observed by comparing the fIMFPROG estimates listed in Table 6,
Table 7, and Table 8.
Also noteworthy is that contrary to the base model estimates, moral hazard effects are
significantly stronger in the modified post-crisis regression for total lending arrangements (see
Table 5). This suggests that our base model is either wrongly specified, or that the considerable
sample size reduction in the modified model produces misleading aggregate post-crisis estimates.
The latter possibility may also imply that moral hazard effects are largely country specific, and
thus the 2008 financial crisis heightened moral hazard effects only among certain Fund
recipients.
Robustness Tests
Contrary to the model constructed in this paper and in Mina and Martinez-Vazquez (2002),
creditor moral hazard is estimated by regressing bond spreads in Noy (2008) and in Lee and Shin
(2008). Noy (2008), and Lee and Shin (2008) find that the 1990s financial crises did not generate
additional moral hazard effects, which contradicts Mina and Martinez Vazquez (2002). These
differing results may imply that analysing moral hazard through sovereign debt maturities or
bond spreads produce different estimates. We perform robustness tests by separately regressing
bond spreads and debt maturities on the previous control variables.
As in Lee and Shin (2008), and in Noy (2008), J.P Morgan’s Emerging Markets Bond Index
(EMBI) is used as a measure for bond spreads. The EMBI dataset includes eighteen emerging
economies and measures secondary market spreads. The following robustness test results show
that our model is weakly robust when compared to a model that estimates bond spreads.
25
Coefficient estimates for fIMFPROG are negative when bond spreads and debt maturities are
regressed for total IMF lending arrangements between 1997-2014 (see Table 9). Although, this
variable is statistically significant at the 10% confidence level when spreads are regressed,
whereas it is insignificant at the 10% level when maturities are measured. Moreover, the
coefficient estimates are positive, and the moral hazard proxy is statistically insignificant in both
regressions between 1997-2002 (see table 10). This can also be observed in Table 11 when
comparing the two model estimates between 2001-2007. We are unable to perform a robustness
check for the post-crisis period because there is no EMBI data available for this subsample
group.
A similar pattern can be observed in Table 12 when analysing SBA lending between 1997-
2014, as the coefficient estimates for fIMFPROG are both negative and statistically insignificant.
Although, 1997-2014 EFF regression estimates differ in sign when separately regressing bond
spreads and debt maturities. The moral hazard proxy for EFF lending is also statistically
significant when spreads are regressed, while it is statistically insignificance in the original
model (see Table 13). Robustness tests cannot be performed for ECF lending due to missing
data.
Overall, these results demonstrate that the model employed in this paper is weakly robust
when estimating total arrangements and SBA moral hazard effects. However, these two models
produce vastly different estimates for the control variables, as well as for the EFF lending moral
hazard effects. This implies that secondary market bond spreads and international debt maturities
tend to capture different lending behaviours. Despite these weak robustness results, it is evident
that the opposing findings in Noy (2008) and in Mina and Martinez-Vazquez (2002) are largely
caused by the analysis of different sample participants. The EMBI data employed in Noy (2008)
26
is available for few Fund recipients, whereas data on sovereign debt maturities is available for
most IMF lending recipients. Given these robustness results and the availability of data on debt
maturities, it is evident that the model constructed in this paper is useful for analysing aggregate
moral hazard effects across different IMF lending programs. Although, it may not capture
lending behaviours as well as the models constructed in Noy (2008), and Lee and Shin (2008).
The main results are presented in the following tables. We report coefficient estimates and their associated p-
values.
TABLE 1: Total Lending Arrangements

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept 2.159 0.660 5.774 6.341
(0.184) (0.798) (0.139) (0.057)
fWITHDRAWN -0.004 -0.003 -0.015 0.008
(0.720) (0.856) (0.344) (0.510)
fIMFPROG -1.432 -0.671 -0.191 -0.241
(0.000) (0.015) (0.665) (0.473)
lRESTD 0.008 0.014 0.051 0.006
(0.000) (0.662) (0.128) (0.578)
lGDPCAPGR 0.264 0.272 0.207 0.093
(0.000) (0.000) (0.022) (0.112)
lCREDIT 0.062 0.141 0.066 0.108
(0.001) (0.000) (0.369) (0.023)
lGDPCAP 0.001 0.001 0.002 -0.000
(0.000) (0.003) (0.079) (0.828)
IMPGDP 0.063 -0.007 0.033 0.100
(0.007) (0.832) (0.471) (0.015)
lTEDGDP 0.020 0.028 -0.030 -0.005
(0.002) (0.034) (0.095) (0.814)
fDEVALUE 0.014 0.021 -0.018 -0.010
(0.157) (0.022) (0.471) (0.733)
fINFLATION 0.009 -0.021 -0.071 -0.011
(0.584) (0.510) (0.205) (0.842)
lINSTCHNG -1.636 -2.771 1.850 2.040
(0.065) (0.056) (0.463) (0.308)
Within R 2 0.154 0.143 0.150 0.035
Between R 2 0.259 0.256 0.079 0.335
Overall R 2 0.218 0.223 0.085 0.298
Number of obs. 1,273 354 371 259
Number of groups 67 59 53 37
NOTES: The numbers in bold are coefficient estimates, and the numbers between brackets are probability values.
27
TABLE 2: SBA Lending Arrangements
STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept -4.106 -2.388 -2.080 5.024
(0.123) (0.647) (0.761) (0.417)
fWITHDRAWN -0.005 -0.030 -0.100 -0.017
(0.842) (0.415) (0.011) (0.505)
fIMFPROG 0.239 2.410 2.574 0.150
(0.701) (0.036) (0.074) (0.796)
lRESTD 0.017 0.144 0.166 -0.003
(0.090) (0.016) (0.008) (0.944)
lGDPCAPGR 0.374 0.732 0.532 0.195
(0.000) (0.000) (0.005) (0.085)
lCREDIT -0.008 0.120 -0.040 0.103
(0.772) (0.005) (0.617) (0.145)
lGDPCAP 0.001 0.001 0.001 -0.001
(0.000) (0.064) (0.458) (0.389)
IMPGDP 0.178 -0.026 0.248 0.221
(0.000) (0.720) (0.007) (0.004)
lTEDGDP 0.075 0.078 0.080 0.010
(0.000) (0.035) (0.030) (0.761)
fDEVALUE 0.018 0.021 0.045 -0.048
(0.136) (0.077) (0.129) (0.296)
fINFLATION 0.008 -0.060 -0.140 0.061
(0.710) (0.202) (0.113) (0.438)
lINSTCHNG -1.911 -3.430 6.587 3.042
(0.163) (0.157) (0.068) (0.309)
Within R 2 0.137 0.244 0.356 0.119
Between R 2 0.234 0.084 0.196 0.344
Overall R 2 0.197 0.127 0.222 0.324
Number of obs. 703 180 154 126
TABLE 3: EFF Lending Arrangements

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept -6.947 1.220 4.748 -7.649
(0.015) (0.837) (0.663) (0.465)
fWITHDRAWN -0.011 0.026 0.131 0.061
(0.695) (0.465) (0.002) (0.048)
fIMFPROG -2.154 -2.915 -5.267 -0.518
(0.000) (0.000) (0.200) (0.249)
lRESTD 0.008 0.052 -0.123 0.063
(0.000) (0.382) (0.187) (0.163)
lGDPCAPGR 0.391 0.604 -0.106 0.082
(0.000) (0.000) (0.675) (0.509)
lCREDIT -0.064 0.061 -0.094 0.031
(0.082) (0.344) (0.569) (0.719)
lGDPCAP 0.004 0.000 0.004 0.004
28
(0.000) (0.962) (0.025) (0.160)
IMPGDP 0.188 0.054 0.259 0.123
(0.001) (0.540) (0.027) (0.371)
lTEDGDP 0.073 0.097 -0.088 0.004
(0.000) (0.024) (0.154) (0.942)
fDEVALUE 0.020 0.022 -0.030 0.016
(0.364) (0.446) (0.726) (0.760)
fINFLATION -0.023 0.003 -0.144 -0.052
(0.786) (0.986) (0.406) (0.703)
lINSTCHNG 6.450 2.319 -1.459 -13.108
(0.000) (0.395) (0.819) (0.007)
Within R 2 0.429 0.483 0.598 0.253
Between R 2 0.024 0.001 0.001 0.014
Overall R 2 0.120 0.167 0.005 0.005
Number of obs. 418 102 49 77
TABLE 4: ECF Lending Arrangements

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept 7.995 9.257 0.977 15.824
(0.000) (0.005) (0.766) (0.003)
fWITHDRAWN -0.007 -0.020 -0.003 -0.009
(0.497) (0.109) (0.846) (0.489)
fIMFPROG -0.712 0.585 -0.406 -0.129
(0.004) (0.007) (0.160) (0.817)
lRESTD -0.020 -0.111 0.047 0.026
(0.014) (0.001) (0.123) (0.009)
lGDPCAPGR 0.240 0.086 -0.027 0.069
(0.000) (0.168) (0.749) (0.275)
lCREDIT 0.136 0.113 0.182 -0.135
(0.000) (0.100) (0.039) (0.074)
lGDPCAP 0.001 -0.005 0.004 -0.005
(0.005) (0.017) (0.037) (0.084)
IMPGDP -0.053 -0.014 0.059 0.047
(0.034) (0.629) (0.026) (0.258)
lTEDGDP -0.019 0.001 -0.026 0.014
(0.007) (0.911) (0.009) (0.345)
fDEVALUE -0.054 -0.038 0.063 0.024
(0.008) (0.046) (0.129) (0.279)
fINFLATION -0.027 0.022 -0.029 -0.104
(0.470) (0.606) (0.656) (0.125)
lINSTCHNG -0.120 -5.841 0.618 2.108
(0.904) (0.004) (0.801) (0.473)
Within R 2 0.190 0.220 0.157 0.123
Between R 2 0.020 0.036 0.056 0.041
Overall R 2 0.061 0.011 0.029 0.028
29
Number of obs. 741 216 280 175
TABLE 5: Total Lending Arrangements (with real exchange rate changes)

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept 7.721 -0.314 5.246 31.707
(0.001) (0.927) (0.494) (0.000)
fWITHDRAWN 0.013 -0.009 -0.040 0.026
(0.346) (0.670) (0.148) (0.108)
fIMFPROG -1.639 -0.783 0.098 -0.658
(0.000) (0.017) (0.886) (0.061)
lRESTD 0.008 -0.078 -0.035 0.033
(0.000) (0.137) (0.518) (0.069)
lGDPCAPGR 0.303 0.431 0.305 0.215
(0.000) (0.001) (0.089) (0.003)
lCREDIT 0.088 0.164 0.009 0.027
(0.010) (0.003) (0.946) (0.717)
lGDPCAP 0.000 0.001 0.004 -0.007
(0.826) (0.034) (0.071) (0.000)
IMPGDP 0.047 0.083 0.121 0.153
(0.204) (0.089) (0.259) (0.028)
lTEDGDP -0.007 0.009 -0.078 -0.051
(0.477) (0.637) (0.011) (0.269)
lINSTCHNG -1.373 -3.999 3.750 0.762
(0.299) (0.048) (0.428) (0.851)
LNfDEVALUE -0.062 -0.076 -0.070 -0.101
(0.013) (0.006) (0.338) (0.096)
Within R 2 0.239 0.298 0.177 0.277
Between R 2 0.040 0.229 0.077 0.001
Overall R 2 0.129 0.243 0.073 0.002
Number of obs. 608 162 168 126
TABLE 6: SBA Lending Arrangements (with real exchange rate changes)

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept -2.580 - - -
(0.437) - - -
fWITHDRAWN -0.024 - - -
(0.392) - - -
fIMFPROG 0.591 - - -
(0.373) - - -
lRESTD 0.006 - - -
(0.559) - - -
lGDPCAPGR 0.391 - - -
(0.000) - - -
lCREDIT 0.001 - - -
30
(0.985) - - -
lGDPCAP 0.001 - - -
(0.095) - - -
IMPGDP 0.241 - - -
(0.000) - - -
lTEDGDP 0.086 - - -
(0.001) - - -
lINSTCHNG -0.879
(0.591)
LNfDEVALUE -0.039 - - -
(0.153) - - -
Within R 2 0.200 - - -
Between R 2 0.155 - - -
Overall R 2 0.72 - - -
Number of obs. 342 - - -
Number of groups 18 - - -
TABLE 7: EFF Lending Arrangements (with real exchange rate changes)

STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept -5.631 - - -
(0.002) - - -
fWITHDRAWN 0.017 - - -
(0.654) - - -
fIMFPROG -1.273 - - -
(0.005) - - -
lRESTD 0.006 - - -
(0.000) - - -
(0.000) - - -
lCREDIT 0.143 - - -
(0.000) - - -
lGDPCAP 0.004 - - -
(0.069) - - -
IMPGDP 0.308 - - -
(0.000) - - -
lTEDGDP -0.011 - - -
(0.691) - - -
lINSTCHNG -0.971
(0.433)
LNfDEVALUE -0.003 - - -
(0.964) - - -
Within R 2 0.495 - - -
Between R 2 0.786 - - -
Overall R 2 0.600 - - -
31
TABLE 8: ECF Lending Arrangements (with real exchange rate changes)
STDFTEDF 1997-2015 1997-2002 2001-2007 2009-2015
Intercept 11.670 - - -
(0.000) - - -
fWITHDRAWN 0.004 - - -
(0.804) - - -
fIMFPROG -0.579 - - -
(0.106) - - -
lRESTD -0.016 - - -
(0.245) - - -
(0.000) - - -
lCREDIT 0.170 - - -
(0.003) - - -
lGDPCAP 0.000 - - -
(0.724) - - -
IMPGDP -0.059 - - -
(0.222) - - -
lTEDGDP -0.055 - - -
(0.000) - - -
lINSTCHNG -0.979
(0.545
LNfDEVALUE 0.009 - - -
(0.866) - - -
Within R 2 0.216 - - -
Between R 2 0.009 - - -
Overall R 2 0.032 - - -
TABLE 9: Total Lending Arrangements Robustness Test (1997-2014)

SPREAD STDFTEDF
Intercept -325.486 -4.509
(0.002) (0.282)
fWITHDRAWN -1.593 -0.012
(0.199) (0.804)
fIMFPROG -62.206 -1.584
(0.069) (0.255)
lRESTD 4.327 0.122
(0.000) (0.000)
lGDPCAPGR 7.782 0.434
(0.115) (0.030)
lCREDIT 9.341 -0.171
(0.000) (0.001)
lGDPCAP 0.022 0.001
(0.001) (0.000)
32
IMPGDP -3.628 0.113
(0.013) (0.000)
lTEDGDP 2.247 0.216
(0.000) (0.000)
fDEVALUE -0.784 0.013
(0.172) (0.584)
fINFLATION -2.155 -0.064
(0.184) (0.329)
lINSTCHNG -354.330 4.226
(0.000) (0.153)
Within R 2 0.548 0.512
Between R 2 0.713 0.772
Overall R 2 0.601 0.542
Number of obs. 144 144
Number of groups 8 8
NOTES: The numbers in bold are coefficient estimates, and the numbers between brackets are probability
values

SPREAD STDFTEDF
Intercept 104.358 15.857
(0.691) (0.103)
fWITHDRAWN -0.496 0.004
(0.199) (0.896)
fIMFPROG 10.134 1.890
(0.515) (0.130)
lRESTD -1.416 0.135
(0.428) (0.353)
lGDPCAPGR -0.199 0.940
(0.950) (0.001)
lCREDIT -1.191 -0.116
(0.360) (0.037)
lGDPCAP 0.058 -0.000
(0.154) (0.832)
IMPGDP -2.446 -0.096
(0.234) (0.144)
lTEDGDP -0.446 0.025
(0.728) (0.710)
fDEVALUE 0.054 0.026
(0.666) (0.027)
(0.042) (0.199)
lINSTCHNG 29.123 4.923
(0.674) (0.071)
Within R 2 0.316 0.292
Between R 2 0.033 0.966
Overall R 2 0.011 0.556
33
values

SPREAD STDFTEDF
Intercept 627.464 -10.177
(0.002) (0.182)
(0.339) (0.554)
fIMFPROG 0.977 0.232
(0.983) (0.892)
lRESTD -1.115 0.227
(0.582) (0.004)
(0.869) (0.361)
lCREDIT 4.377 -0.429
(0.035) (0.000)
lGDPCAP -0.011 0.002
(0.498) (0.005)
IMPGDP -4.003 0.510
(0.131) (0.000)
lTEDGDP -3.108 0.002
(0.006) (0.968)
fDEVALUE -0.547 0.035
(0.472) (0.225)
fINFLATION -4.866 0.029
(0.145) (0.817)
lINSTCHNG -32.265 -10.567
(0.783) (0.016)
Within R 2 0.129 0.227
Between R 2 0.827 0.925
Overall R 2 0.553 0.760
values
TABLE 12: SBA Lending Arrangements Robustness Test (1997-2014)

SPREAD STDFTEDF
Intercept -384.580 -3.264
(0.000) (0.435)
fWITHDRAWN -0.022 -0.054
(0.991) (0.455)
fIMFPROG -66.735 -2.291
(0.111) (0.164)
lRESTD 4.551 0.119
(0.000) (0.000)
(0.068) (0.055)
34
lCREDIT 9.414 -0.180
(0.000) (0.001)
lGDPCAP 0.024 0.001
(0.000) (0.000)
IMPGDP -3.323 0.098
(0.025) (0.092)
lTEDGDP 2.178 0.225
(0.000) (0.000)
fDEVALUE -0.823 0.010
(0.159) (0.648)
(0.162) (0.426)
lINSTCHNG -381.202 5.218
(0.000) (0.079)
Within R 2 0.528 0.524
Between R 2 0.704 0.786
Overall R 2 0.587 0.556
values
TABLE 13: EFF Lending Arrangements Robustness Test (1997-2014)

SPREAD STDFTEDF
Intercept -467.967 -15.819
(0.000) (0.060)
(0.016) (0.068)
fIMFPROG -82.111 4.638
(0.043) (0.136)
lRESTD 4.220 0.089
(0.000) (0.050)
(0.681) (0.195)
lCREDIT 1.252 -0.115
(0.429) (0.346)
lGDPCAP 0.102 0.005
(0.000) (0.000)
IMPGDP 3.115 0.079
(0.099) (0.583)
lTEDGDP 2.019 0.173
(0.000) (0.000)
fDEVALUE 0.680 -0.020
(0.271) (0.669)
fINFLATION -7.889 0.215
(0.041) (0.465)
lINSTCHNG 102.076 15.295
(0.054) (0.000)
Within R 2 0.845 0.697
35
Between R 2 0.014 0.580
Overall R 2 0.252 0.404
values
6. Discussion
We address the question of whether IMF-induced lender moral hazard effects were present, and
how such effects differed before and after the 2008 global financial crisis. We did so by
separating the short-run commitment and moral hazard effects. The signaling effect is not
accounted for in our model because this is more difficult to directly measure and interpret. There
is thus a possibility that lender moral hazard is overstated or understated in our model. For
instance, moral hazard can be overstated if foreign investors react favourably to IMF lending
liquidity benefits, or to a recipient country’s ambitions that are signaled by its decision to receive
Fund assistance. On the other hand, effects are potentially understated if foreign creditors are
averse to the signing of an IMF program, or to an increase in Fund credit. Our findings must
therefore be viewed with some degree of skepticism.
The effect of anticipated SBA lending was strongly insignificant across every subsample
period when the commitment effect, economic fundamentals, and uncertainty levels were
controlled for. Moreover, expected commitment effects reduced relative short-term debt flows in
the pre-crisis sample period only. Perhaps this is because comparatively more lenders do not
view commitment towards economic reform as effective and/or feasible during recessionary
periods. These results are in large measure inconsistent with Mina and Martinez-Vazquez (2002),
who find that SBA lending arrangements cause positive moral hazard effects and negative
commitment effects before and after a major crisis. This indicates that SBA credit arrangements
only swayed lender behaviour or risk perceptions prior to our pre- and post-crisis timeframes.
36
Like SBA lending, expected EFF lending did not significantly affect public debt maturity
schedules before and after the recent crisis. EFF lending arrangements did, however, generate
lender moral hazard between 1997 and 2002. This is supported by Mina and Martinez-Vazquez
(2002), who measure positive moral hazard effects for EFF lending after the 1994 Mexican
crisis. However, this was not the case following the recent financial crisis. Conversely, expected
withdrawals of EFF resources caused debt maturities to narrow during the pre- and post-crisis
periods. Thus, the notion that commitment towards economic reform tends to induce optimism is
rejected for EFF lending. Mina and Martinez-Vazquez find similar post-crisis results, but also
note that EFF resource withdrawals occurring before the 1994 Mexican crisis lengthened
international debt maturities, which contrasts our pre-crisis findings.
Finally, the results for ECF lending oppose those for EFF lending. Expected ECF
arrangements did not influence relative short-term debt during the pre- and post-crisis subsample
periods. Contrary to the previous program and similar to SBAs, ECF lending arrangements
caused negative moral hazard effects between 1997 and 2002. There is also evidence for
negative lender moral hazard induced by ECF lending in Mina and Martinez-Vazquez (2002).
Regarding the withdrawal effect during this period, committed ECF lending recipients did not
experience changes in relative debt maturities. On the other hand, ECF lending created positive
commitment effects in Mina and Martinez-Vazquez (2002).
Our results suggest that lender-side moral hazard only occurred among EFF and ECF
participants. The former recipients were seemingly most susceptible to moral hazard between
1997 and 2002, whereas it is not clear as to when ECF members endured these effects. This
observation is further reinforced by the revised regressions that include real currency changes
and exclude the weak inflation variable. A possible explanation for these findings is that foreign
37
lenders once viewed EFF recipients as more susceptible to credit defaults during a post-crisis
recovery period, as is the case in Mina and Martinez-Vazquez (2002). This prompted such
creditors to undergo excessive risk-taking in expectation of an imminent IMF bailout.
The evidence presented by Lee and Shin (2008) also demonstrates that investor moral hazard
was strengthened after the 1998 Russian financial crisis among countries that were more likely to
be aided by the IMF. This suggests that creditor moral hazard was more prevalent following the
widespread 1990s crises as foreign investors anticipated more frequent insolvencies. Though,
this view cannot be supported when studying the 2008 global financial crisis because moral
hazard was not strongly present before and after this incident. These conclusions are further
rebutted by Noy (2008), who observe that creditor moral hazard was significantly less prevalent
after the 1990s crises when analysing bond spreads. Although, they are open to the possibility
that the post-crisis effects were “hidden behind repeatedly worsening worldwide outlook for
which [they] are unable to control for” (Noy, 2008, p.73).
There are a few possible reasons as to why IMF lending no longer generates significant
levels of moral hazard. Firstly, IMF bailouts became progressively less frequent and smaller in
size over time. The total SBA, EFF and ECF credit received by our sampled countries measured
17.45 billion U.S dollars between 1997 and 2006. While, it only measured 13.06 billion U.S
dollars between 2007 and 2016. This gradual reduction in IMF assistance possibly detracted
foreign lenders from lending to prospective recipients, as the probability of bailouts was
weakened. Lee and Shin (2008) to some extent reject this notion when analysing international
lending behaviours prior to and following the 1998 Russian financial crisis. As the IMF
unexpectedly decided not to aid Russia during this crisis, many alleged that the moral hazard
effect would be weakened during the subsequent years. Although, this is refuted by Lee and
38
Shin, who maintain that investor moral hazard prevails in countries most likely to receive IMF
intervention.
Hence, an additional explanation for why our findings indicate that moral hazard effects have
dissipated in recent years is that our model fails to accurately measure the probability of future
bailouts and insolvencies. Perhaps fIMFPROG, lINSTCHNG and lTEDGDP are not adequate
proxies for such measures. Moreover, the model estimates may be inaccurate if some control
variables are wrongly specified. This possibility is made evident when fINFLATION is excluded,
and when fDEVALUE is replaced by LNfDEVALUE. These model revisions yield stronger
positive moral hazard estimates after the 2008 financial crisis, as we had initially anticipated
(See Table 5). Although, the extensively reduced sample size ensuing from these revisions
cannot be ignored, and prevents us from dismissing the interpretability of our base model results.
For instance, the base model included 67 IMF recipients, whereas the sample group employed in
the revised model was reduced to 32 recipients.
The IMF is also responsible for signing lending agreements with the most credible recipient
countries, while rejecting those that are least likely to enforce program conditionality. It can be
argued that countries are more likely to default on their international debt as they become less
capable of enforcing or less willing to enforce program conditionality. Considering this,
improvements in the Fund’s ability to weed out prospective recipients with poor intentions
equally reduce the magnitude of moral hazard effects.
Withdrawing IMF program credit weakly influences debt maturities, and therefore lender
behaviour. The direction of this weak relationship is also ambiguous. In theory, greater
commitments towards economic reform should foster confidence in a country’s economic
outlook, which is only supported by the 2001-2007 SBA regression estimates. Greater future
39
SBA credit withdrawals caused average sovereign debt maturities to lengthen during the pre-
crisis period. It is evident that IMF lending rarely rewards recipients that commit to
conditionality as fWITHDRAWN is statistically insignificant in every regression accounting for
total credit arrangements. Additionally, EFF recipients experienced negative commitment effects
during the pre- and post-crisis periods, while committed ECF recipients experienced no
discernible effects.
Our SBA results largely support our assumption that an expected withdrawal of IMF credit is
a credible measure against excessive balance of payment deficits when an economy is not
recovering from a crisis. Credit withdrawals can also raise suspicions that funds will be used
inappropriately during a recovery period, perhaps because self-serving political incentives are
heightened. Although, this fails to explain the occurrence of negative commitment effects
experienced by EFF receivers before and after the 2008 financial crisis.
Commitment to reform thus caused the most favourable risk perceptions for SBA
participants. As supported by Sundac and Andrijic (2016), Arabaci and Ecer (2014), and Van der
Veer and de Jong (2010), SBA reform is more credibly executed by recipient countries as they
possess stronger economic fundamentals relative to EFF and ECF borrowers, and are thus better
equipped to combat balance of payment difficulties.
Our findings on commitment effects differ from those of Mina and Martinez-Vazquez
(2002). Whereas we exclusively find evidence for positive effects caused by commitments
towards SBA conditionality, Mina and Martinez-Vazquez (2002) observe that only committed
EFF and ECF participants were rewarded with relatively less short-term debt flows. We interpret
these differences as a possible loss of confidence for the effectiveness of EFF and ECF lending
programs, and a gain of confidence for SBA program success over time. This is likely the case as
40
our pre- and post-crisis estimates are more closely reflected by recent studies conducted by
Arabaci and Ecer (2014), and Sundac and Andrijic (2016).
Since our empirical model was strongly influenced by Mina and Martinez-Vazquez (2002),
we compare our main empirical findings with theirs in Appendix B. It is important to note that
their pre- and post-crisis periods are defined between 1992-1994 and 1995-1997 respectively. In
comparison, ours are defined between 2001-2007 and 2009-2015.
The model employed in our paper possesses certain limitations. The fact that comparatively
less control variables are statistically significant across the subsample regressions might be due
to insufficiently large subsample sizes. Poor specification may be another reason why the control
variables lack explanatory power. With regards to the fINFLATION and fDEVALUE variables, it
may have been more intuitive to assume that proxies for inflation and real exchange rate
volatility are stronger uncertainty measures. Although, we find no evidence to suggest that
inflation volatility is a better uncertainty measure. Implementing real exchange rate changes as
an uncertainty proxy yields more significant results. Though, it prevents us from separately
analysing the three IMF subsample periods across IMF programs due to insufficiently large data.
Furthermore, our model does not control for the signaling effects caused by IMF lending.
Positive signaling effects can occur if the issuance of IMF credit generates optimism among
foreign investors about a recipient country’s future economic health and/or liquidity standings.
This signifies that our model overstates lender moral hazard if some positive signaling effects are
unintentionally accounted for by the moral hazard proxy. Although, it is logical to assume that
signaling effects are mostly influenced by the signing of Fund lending arrangements, as opposed
to anticipated arrangements. A final possibility is that the determinants of relative short-term
debt are not uniform over time, or differ across countries and program recipient types. These
41
limitations potentially undermine our results, as the estimated moral hazard effects fail to
correspond with our expectations and consensus about lender moral hazard in the literature.
Lastly, the robustness test results raise doubts about the strength of our model. It is evident
that using bond spreads instead of debt maturities as a dependent variable can produce different
moral hazard estimates. This does not necessarily imply that our model is weak, but there is a
possibility that bond spreads more accurately capture lenders’ risk perceptions.
7. Conclusion
We find evidence that IMF lending can generate moral hazard by causing foreign lenders to
widen the maturity structure of their loans. This outcome was predominant following the
widespread 1990s financial crises, but not during the seven years prior to and after the 2008
global financial crisis. More specifically, the size of future EFFs generated moral hazard between
1997 and 2002, while ECFs and SBAs created pessimism among foreign investors during this
period. The overall findings are largely supported by earlier literature that also note the presence
of moral hazard effects spurred by the 1990s crises. Although, our findings for the 2001-2007
and 2009-2015 subsample periods fail to support our hypothesis that financial crises uniformly
stimulate moral hazard incentives, which seems to have been the case for previous crises. It can
therefore be concluded that IMF lending no longer generates significant levels of moral hazard at
the aggregate level, and major crises do not necessarily produce additional moral hazard effects.
Commitment effects were not prevalent across time as noted by the weak relationship
between IMF credit withdrawals and international loan maturities. Overall, commitment effects
were only positive during the pre-crisis period, but they disappeared after the recent financial
crisis among SBA recipients. We explain these findings by maintaining that the withdrawal of
IMF credit by more developed economies after a crisis signals their financial vulnerability. In
42
comparison, devoted EFF and ECF users failed to be viewed as less risky debt recipients among
foreign lenders during the pre- and post-crisis periods. This is widely supported by recent studies
that describe SBA beneficiaries as the most credible committers to program conditionality, but is
dismissed by studies focusing on earlier crises.
Future studies on IMF-induced moral hazard should estimate the effects over a wider period
and should construct more proxies for non-economic related uncertainty. Moreover, better
measures for inflation rate volatility, and real exchange rate changes should replace the
fINFLATION and fDEVALUE variables respectively. Inflation rate volatility and real currency
devaluations and/or depreciations should significantly and positively affect relative short-term
sovereign debt flows given a sufficiently large sample size. An additional consideration is to
convert the data in natural logarithmic form. This is especially important for instruments
measuring volatility. A final suggestion is to construct control variables that account for the
signaling effects. Doing so would separate such effects from the moral hazard instrument. We
strongly believe that these alterations will strengthen the control variables’ statistical
significance, and will thus contribute to more accurate moral hazard estimates. Given our
robustness tests, it is also apparent that bond spreads and debt maturities can produce different
moral hazard estimates. Future studies should thus evaluate which measure better represents
lenders’ risk perceptions.
43
Appendix A: Measurements and data sources for variables
Variable Measurement Data Retrieved From Data Source
SPREADS Index of dollar-denominated J.P. Morgan Emerging
J.P Morgan
sovereign bonds Markets Bond Index
STDFTEDF Short-term external debt as a World Development
World Bank
percentage of total external debt Indicators
fWITHDRAWN Percentage of withdrawn IMF International IMF Lending
credit Monetary Fund Arrangements
fIMFPROG Total agreed credit amount as a International IMF Lending
percentage of GDP Monetary Fund Arrangements
lRESTD Foreign reserves as a percentage World Development
World Bank
of total external debt Indicators
fINFLATION CPI inflation World Development
World Bank
Indicators
lTEDGDP Total external debt as a percentage World Development
World Bank
of GDP Indicators
IMPGDP Imports as a percentage of GDP World Development
World Bank
Indicators
lGDPCAPGR Real GDP per capita growth World Development
World Bank
Indicators
lCREDIT Domestic credit in private sector as World Development
World Bank
a percentage of GDP Indicators
fDEVALUE Nominal exchange rate percentage World Development
World Bank
change Indicators
lGDPCAP Real GDP per capita in 2010 USD World Development
World Bank
Indicators
lINSTCHNG Rule of Law Index Worldwide
World Bank
Governance Indicators
LNfDEVALUE Real exchange rate percentage World Development
change World Bank Indicators
44
Appendix B: Comparison between empirical findings
Mina and Martinez-Vazquez (2002) Virone (2018)
Pre-crisis Post-crisis Pre-crisis Post-crisis
Total Lending Total Lending
No moral hazard Significant moral No moral hazard No moral hazard
effects hazard effects effects & effects &
no commitment effects no commitment effects
SBA Lending SBA Lending
Significant moral Significant moral Weakly negative moral No moral hazard
hazard effects & hazard effects & hazard effects & effects &
negative commitment negative commitment positive commitment no commitment effects
effects effects effects
EFF Lending EFF Lending
No moral hazard Significant moral No moral hazard No moral hazard
effects & significantly hazard effects & effects & effects &
positive commitment negative commitment negative commitment negative commitment
effects effects effects effects
ECF Lending (Formerly ESAF) ECF Lending
Significantly negative No moral hazard No moral hazard No moral hazard
moral hazard effects & effects & significantly effects & effects &
positive commitment negative commitment no commitment effects no commitment effects
effects effects
Conclusions: IMF lending creates significant Conclusions: Positive moral hazard did not occur
moral hazard, and credit withdrawals influence before and after the 2008 global financial crisis.
lending behaviours. Stronger moral hazard Thus, financial crises do not create additional
effects and weaker commitment effects occurred moral hazard. Commitment effects are only
after the 1994 Mexican peso crisis. positive for SBA lending before the crisis, and
were weakened after the crisis.
45
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48

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IMF LENDING AND MORAL HAZARD: AN EXAMINATION OF DEBT MATURITY

Michael Gianni Virone

presented to Ryerson University

in partial fulfillment of the

requirements for the degree of

International Economics and Finance

Toronto, Ontario, Canada, 2018

©Michael Gianni Virone, 2018

any required final revisions.

I understand that my MRP may be made electronically available to the public.

Michael Gianni Virone

likely dissuaded foreign investors from lending imprudently in anticipation of rescue

packages or program extensions.

my parents, who have supported me throughout my academic career. Their relentless

encouragement has enabled me to pursue this degree.

the affected countries, conditional to the implementation of macroeconomic policies proposed by

in turn may heighten the degree or likelihood of a future financial crisis.

moral hazard undermines an assistance program’s effectiveness in averting or resolving a

evaluate the harmful effects brought about by moral hazard.

short-run. We do so by estimating how international debt maturities react to expectations of

recipient countries, and time.

investigate debt maturities to set the stage for our topic.

2.1 Debt Maturities and Financial Crises

economic uncertainty, but only for very high levels of volatility.

Mina and Martinez-Vazquez (2006) support Valev’s results regarding non-economic

of short-term debt within emerging economies.

Lorenzoni, 2013). Ironically, the accumulation of short-term debt in anticipation of a crisis

2.2 Catalytic Effect

participating countries by signaling to foreign investors the presence of improved liquidity

undergoing financial distress.

Earlier studies overwhelmingly find no presence of positive catalysis. Edwards (2006)

default will not occur.

certain circumstances. It is commonly observed that countries demonstrating greater levels of

fundamentals seem to experience the strongest short-run signaling effects.

significantly improves the terms of debt, which implies an improvement in access to

consisting of economies with stronger economic fundamentals.

commitment to IMF arrangements respectively. As in the other bodies of research, SBAs

2.3 Moral Hazard

likelihood of future IMF bailouts, as opposed to changes in borrowing-country fundamentals or

were noted for ESAFs.

premiums to Fund members who more frequently renege on their obligations.

borrower moral hazard incentives in the long-run.

absence of moral hazard.

and non-economic related uncertainty. We can therefore interpret an increased issuance of

relative long-term debt in anticipation of a Fund bailout as a decrease in perceived risk by

𝑆𝑇𝐷𝐹𝑇𝐸𝐷𝐹𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐼𝑇𝐻𝐷𝑅𝐴𝑊𝑁𝑖,𝑡+1 + 𝛽2 𝐼𝑀𝐹𝑃𝑅𝑂𝐺𝑖,𝑡+1 + 𝛽3 𝑅𝐸𝑆𝑇𝐷𝑖,𝑡−1

+ 𝛽4 𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁𝑖,𝑡+1 + 𝛽5 𝑇𝐸𝐷𝐺𝐷𝑃𝑖,𝑡−1 + 𝛽6 𝐼𝑀𝑃𝐺𝐷𝑃𝑖𝑡 + 𝛽7 𝐺𝐷𝑃𝐶𝐴𝑃𝐺𝑅𝑖,𝑡−1

+ 𝛽8 𝐶𝑅𝐸𝐷𝐼𝑇𝑖,𝑡−1 + 𝛽9 𝐷𝐸𝑉𝐴𝐿𝑈𝐸𝑖,𝑡+1 + 𝛽10 𝐺𝐷𝑃𝐶𝐴𝑃𝑖,𝑡−1 + 𝛽11 𝐼𝑁𝑆𝑇𝐶𝐻𝑁𝐺𝑖,𝑡−1

macroeconomic policies. TEDGDP is total external debt as a percentage of GDP, and is an

significant. We interpret a percentage increase in fund withdrawals as the IMF’s approval of a

who receive SBAs.

related to relative sovereign debt maturities.

2018; Bengui, 2011).

accumulating long-term debt.

available in monthly time-frequencies, it is converted into yearly data by calculating 12-month

averages for each sample year.

data sources used to develop the dependent and explanatory variables.

is therefore imperative because failing to do so overstates the estimated commitment effects

appreciations, whilst experiencing real depreciations, and vice-versa.

The Hausman specification test is employed to determine whether a fixed-effects or random

members was considerably weaker, with a coefficient of -0.712.

dissuaded foreign investors from lending imprudently in anticipation of rescue packages or

stronger prior to 2008