The covariate balancing checks are available upon request from the authors. can they be made to work better? Instrumental variables regression with weak instruments. Sri Lankas interest payments on decades of borrowing are now almost equal to the debt principal outstanding. All Courses. Growing debt vulnerability is not a new challenge for many countries. Evaluating the treatment effect of inflation targeting in seven industrial countries. We consider a five-year window as reforms may take some time to be implemented under IMF-supported programs.7 Appendix Table Table1616 lists countries that have signed at least one program in our sample together with the number of programs, and Appendix Table Table1717 reports the list of countries in the present analysis. The treatment variable is the presence of IMF-supported programs. Following this literature, we use the UNGA affinity index as our first candidate of instrumental variables for IMF programs. Finally, a similar picture emerges from the fiscal balance, which improves from 2.96% before the program to 2.45% during the program, the difference being statistically significant (t = 1.87, p value = 0.06). Robust standard errors are in parentheses, IMF-supported programs and sovereign debt crisesRobustness checks, alternative specifications, This table presents the effect of IMF-supported programs on sovereign debt crises obtained by weighted least squares regressions. In this paper, we employ the entropy balancing methodologya generalization of conventional matching methods proposed by Hainmueller (2012)to overcome the counterfactual and endogeneity issues with regard to the adoption of an IMF program. In this paper, we analyze the role of bailouts in mitigating the likelihood of subsequent sovereign defaults in developing countries, taking IMF-supported programs as an example. In column [6] of Table Table9,9, the control units balance constraints are reweighted to include the 1st and the 2nd momentsmeans and variances. In contrast to regression-based analyses, the entropy balancing estimates do not suffer from multicollinearity because its reweighting scheme orthogonalizes the covariates with respect to the treatment measurethe adoption of IMF-supported programs. First, the coefficients of our instruments are statistically significant at the 1% level with the signs consistent with the theory. Carmens related research, please visit her website here. Thus, it excludes defaults with official creditors. 2016). In robustness checks, we also employ an instrumental variable approach and conventional matchings. Column [5] of Table Table99 excludes this crisis period from the analysis to isolate its impact. Practically, to estimate with the entropy balancing, we follow two consecutive steps. RepublicGrenadaMalawiPhilippinesUganda17. IMF loans may affect sovereign defaults through conflicting channels (Jorra 2012). You may notice problems with It estimates significant and persistent negative effects of debt crises starting at 1.6% of GDP and peaking at 3.3%, before reverting to . Beers D, Mavalwalla J. For each estimator, we report two regressions for each group of shareholders (G7, G5, and USA): one excluding and one including regional fixed effects. Columns [1][5] of Table Table66 report the results of the entropy balancing using Jorras definition of debt crisesdefaults on marketable external debt. Chief Economist at the World Bank, maintains several databases on her website related notably to the dates of crises or debt-to-GDP ratios; Original Sin: The Pain, the Mystery, and the Road to Redemption, Eichengreen, Hausmann, Panizza, 2002; In Table Table1,1, the unconditional probability of a sovereign defaultthe number of crises divided by the number of non-missing country-year observationsis 3.5% points (pp). External debt The final alternative specification check consists of controlling for a large set of control variables that may affect both countries likelihood of signing IMF programs and experiencing sovereign defaults. A notable exception is Jorra (2012) who analyzes the effect of IMF bailouts on the probability of subsequent sovereign defaults. Tables Tables22 and and33 present the sample means of matching covariates before and after weighting used to estimate the impact of IMF-supported programs on SDC. The magnitude of the coefficients varies between 1.3 and 1.5 pp. Low-income countries need to improve their tax-collection efforts to minimise the need to borrow, which is costlier and an added burden. In our benchmark approach, we employ the entropy balancing methodology, a generalization of conventional matching methods proposed by Hainmueller (2012), and recently used by Neuenkirch and Neumeier (2016) to study the impact of U.S. sanctions on poverty, and by Balima (2017) to analyze the effect of domestic sovereign bond market participation on financial dollarization. Lending bodies come to the rescue of such countries by offering state-contingent debt instruments (SCDIs). We develop an early-warning model of sovereign debt crises. An effective crisis management programme would help a low-income country in tough times. On the other hand, countries usually turn to the Fund during times of economic downturnin particular when a crisis is loomingdue to the Funds mandate of being the international lender of last resort. The paper contrasts output losses across different crises and finds that sovereign debt crises tend to be more costly than banking crises, and these in turn tend to be more costly than currency crises. IMF Members' Quotas and Voting Power, and Board of Governors, IMF Regional Office for Asia and the Pacific, IMF Capacity Development Office in Thailand (CDOT), IMF Regional Office in Central America, Panama, and the Dominican Republic, Financial Sector Assessment Program (FSAP), Currency Composition of Official Foreign Exchange Reserves, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet. The final index is additive, with a minimum value of 1 (low coerciveness) and a maximum value of 10 (very high coerciveness) and is measured for each debt crisis year. Finally, a third mechanism, linked somewhat to the previous channel, is the role of conditionalities in IMF programs. Sovereign debt crises are a recurring feature in the international financial landscape. Defaults had the biggest impact globally in the 1980s, peaking at 6.2% in 1990, and they have fallen substantially since then, even in 2012-2013 when Euro Area sovereigns were involved. Sovereign debt risk in emerging market economies: does inflation targeting adoption make any difference? Reinhart CM, Trebesch C. The international monetary fund: 70 years of reinvention. On the one hand, it is hard to properly predict the outcome that would have emerged without a program and to quantify the impact induced by program participation. We can therefore conclude that our instruments for IMF lending are relevant and valid. Before we examine the result of our main variable of interestIMF-supported programlet us focus on the relevance and validity of the instruments. Presenting preliminary estimates of external debt stocks at end-2021 for low- and middle-income countries and information on new bond issuance in international capital markets. We use representative country histories to elaborate and complement some of the patterns seen in the global aggregates. Indeed, the macroeconomic environment of these two groups may differ beyond the set of covariates employed in the entropy balancing approach. American Economic Journal: Macroeconomics. The number of matched N varies between 1 and 10. All these covariates are lagged by one year to overcome reverse causality issues. Can official crisis lending be counterproductive in the short run? In implementing the BCM, we consider the number of matched, n varying between 1 and 10. This column quantifies the aggregate costs of defaults using a narrative approach on a large panel of 50 sovereigns between 1870 and 2010. They show that bailouts lower the likelihood of a sovereign default in the short run and restore the confidence of private lenders through increasing their willingness to provide new credit to the borrowing government. Besides, repayment of such loans can be paused if the borrower faces difficulty in debt repayment. The online version supplementary material available at 10.1057/s41308-021-00135-7. Following Lin and Ye (2007), and Balima et al. Menu. The estimated effects reported in both columns remain negative and statistically significant, suggesting that using additional moment conditions confirms our previous finding. The resulting yearly database starts in 1980 and covers 251 crisis-year episodes in 31 developing countries that defaulted on sovereign debt. The treatment variable is the presence of IMF-supported programs. This section aims to shed light on the mechanisms behind the results. The results reported in Table Table1515 indicate on the one hand that the synthetic control group computed from our entropy balancing differs from the program group before program implementation. The treatment variable is the presence of IMF-supported programs. In addition, Table Table1515 also points out that the treatment group experiences a more favorable change in sovereign credit rating and lower debt and fiscal deficit ratios during the treatment period compared to the synthetic control group. P indicates if the unit of observation is subject to the treatment IMF-supported program (P=1) or not (P=0). On the other hand, the implementation of IMF-supported programs has been accompanied by a significant decrease in the above outcomes. Even if these countries improve their tax collection, nearly 50 of them still face challenges in their efforts to end extreme poverty. Reinhart CM, Rogoff KS. 2015). Domestic debt 2000). Turkey: With Indias recent ban on wheat exports, Turkey also faces a food shortage. If the government restructured its debt without a suspension of payments, we would record the sovereign crisis year as the year of the restructuring. Finally, the stratification matching uses several strata to increase the quality of the comparison and to estimate the treatment effect. 2009; Reinhart and Rogoff 2011). is a Division Chief at the IMFs African Department. In Tables Tables1111 and and12,12, the coefficients of IMF-supported programs are negative and statistically significant, even if their magnitudes are somewhat smaller compared to the entropy balancings estimates. 2006; Dreher and Walter 2010; Papi et al. The first sign appears when the country finds it cannot get a low interest rate from lenders. The costs of sovereign default. Saravia D. On the role and effects of IMF seniority. Column [1] shows the regressions result without the matching covariates in the second step of the entropy balancing. is the outcome variable measuring the occurrence of a sovereign debt crisis. Practices, Structure and Share Data for the U.S. Offices of Foreign To see The economic impact of short-term IMF engagement in low-income countries. 12Following Sy (2002), we use a linear transformation to convert ratings into a discrete variable. Finance, 20, 185-199. The magnitude of the coefficient of our preferred specification is 1.3 pp in column [5]. Kenneth Rogoff, Free Download. The crisis is adding to spending needs as countries seek to mitigate the health and economic effects of the pandemic, while fiscal revenues are falling due to lower economic activity. (2006) that shows that lending support not only has an impact on the likelihood and the possible incidence of a crisis, but also prompts the borrowing government to implement desirable policies and reforms. Balima WH. In the following, we perform a large set of robustness exercises to ensure that this finding is not sensitive to alternative specifications and identification strategies. The treatment variable is the presence of IMF-supported programs. 2004. The IV results confirm the entropy balancing finding that IMF lending programs statistically and economically reduce the probability of subsequent sovereign defaults.
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