Tito Cordella, Andrew Powell, 02 September 2019

Countries almost always repay loans from the IMF and the World Bank before others, even though this preferred treatment rarely appears in legal contracts. This column presents a framework to investigate this puzzle. It argues that the ability to restrict lending allows international financial institutions to lend at the risk-free rate and creates incentives for repayment. IMF and World Bank loans are thus complementary to commercial lending.

Susan Schadler, 28 April 2014

The IMF has had a preferred creditor status throughout the history of its lending. This implies that borrowing countries are expected to give priority to meeting their obligations to the IMF over other creditors. This column reviews the onset of this preferred status, its purpose, and the way it changed after the recent Eurozone crisis. By lending €30 billion to Greece in 2010, the IMF introduced the option to permanently waive the requirement that a borrowing country is on the path to stability. This option increases the chance of moral hazard and undermines the strong framework for the preferred creditor status.

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