The IMF in a World of Private Capital Markets

IMF Working Papers, April 1, 2005

Source details

Authors: Ashoka Mody, Barry J. Eichengreen, Kenneth Kletzer
Date: April 1, 2005
Core thesis: The IMF attempts to catalyze and stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. The paper contrasts cases where banks and bondholders supply lending and analyzes differential IMF influence across these markets.

Banks and bondholders differ in market strengths:
- Banks have a natural advantage in monitoring and creditor coordination.
- Bonds have superior risk sharing characteristics.
Information effects and spreads:
- Banks reduce spreads as they obtain more information through repeat transactions with borrowers.
- Repeat borrowing has little influence in bond markets, where publicly available information dominates.
IMF program influence on bond markets:
- Spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders.
- The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.

IMF monitoring and emergency finance can play distinct roles depending on the dominant private creditor type:
- With bank-dominated lending, emphasis on repeat engagement and creditor coordination aligns with banks’ information acquisition advantages.
- With bond-dominated funding, IMF-supported programs can serve as a public signal that lowers bond spreads, particularly for liquidity-vulnerable countries.
Design considerations:
- Tailor IMF engagement to market structure—leverage program signaling in bond markets and support mechanisms that enhance bank monitoring and coordination where banks predominate.