Sovereign default risk, the IMF and creditor moral hazard

The IMF potentially creates moral hazard when it provides bailouts to countries in a financial crisis. We ask whether a creditor moral hazard is observable in the data. We test the hypothesis that recent unprecedented bailouts – starting with the 1994 Mexican crisis – changed international investors’ perception of default risk on international borrowing. Our events-study approach identifies important and unexpected IMF-related events and examines the dynamics of the unexplained component of the risk premia on sovereign bonds surrounding the identified events. In contrast with many policy discussions, we conclude that no change in the moral hazard effect is observed for the last decade. © 2006 Elsevier B.V. All rights reserved. JEL classification: F33; F34; G14