An analysis of IMF-induced moral hazard

Three channels through which the IMF rescue package may affect international lending can be distinguished: debtor-side moral hazard, creditor-side moral hazard, and debtor and creditor-side moral hazard. We show that if the rescue package fully benefits the debtor, no credit contract between him and the creditor arises. The other two kinds of moral hazard, where the creditor receives the rescue package either fully or in part, increase the scale of international lending relative to the case where no rescue package is forthcoming. The increase is larger if the creditor receives the whole rescue package than if it is shared between the creditor and the debtor. These results are based on the analysis of two sequential credit relationships, the first one between a bank and a government and the following one between the IMF and the government. Each of these credit relationships is characterized by asymmetric information and modeled by a moral hazard model. The two moral hazard models are linked by considering the different channels of the IMF rescue package. (C) 2003 Elsevier B.V. All rights reserved.