Moral Hazard in IMF Loans How Big a Concern?

• Author: Kenneth S. Rogoff
• Position: IMF Economic Counsellor and Director of the IMF's Research Department

It is an article of faith among many IMF critics that industrial country taxpayers bear the costs of IMF loans-the critics call them "bailouts"-to countries in crisis. The standard scenario is supposedly this: A developing country borrows money; it runs into repayment difficulties; capital markets dry up; the IMF ponies up a giant loan; the country is saved from the consequences of its profligacy; the private creditors get paid off in full; the IMF gets left holding the bag; and, thus, taxpayers in industrial countries, which are the IMF's main shareholders, end up footing the bill. Insidiously, the prospect of future "bailouts" fuels not only excessive lending to emerging market countries at interest rates that do not adequately reflect underlying risks but also irresponsible policies. Thus, the critique goes, the IMF helps cause and exacerbate crises of the kind that the organization was designed to prevent and ameliorate.

I will be the first to concede that this "moral hazard" theory of IMF lending is clever, having spent many years in the 1980s studying it and writing papers about it (including a 1988 piece with Jeremy Bulow of Stanford University that appeared, of all places, in IMF Staff Papers. Who says the IMF never listens to its critics?). Concerns over bailouts and the resultant moral hazard have certainly become influential in policy circles, particularly since the emerging market crises of the 1990s. But where is the empirical evidence that moral hazard in IMF lending is important, at least in this crude form?

It is certainly not easy to show. The first inconvenient fact is that IMF loans have had a stubborn habit of being repaid in full. Although some countries have gone into arrears, almost all have eventually repaid the IMF: the actual realized historical default rate is virtually nil. If we live in a world where virtually all countries will always repay their IMF loans in full, the IMF moral hazard theory is a bust, at least in its most worrisome form. But haven't IMF rescue packages sometimes had the effect of helping private creditors? Perhaps to some extent, yes, but the losses suffered by international investors and creditors, including foreign banks, during crises that the IMF has helped resolve-as a result of currency crashes, asset price declines, and debtor defaults-suggest that IMF lending has hardly provided a blanket to private lenders.

Wait, though: might the good repayment record of IMF loans be...