IMF Working Papers

Moral Hazard and International Crisis Lending: A Test

ByGiovanni Dell'Ariccia, Jeromin Zettelmeyer, Isabel Schnabel

October 1, 2002

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Giovanni Dell'Ariccia, Jeromin Zettelmeyer, and Isabel Schnabel. "Moral Hazard and International Crisis Lending: A Test", IMF Working Papers 2002, 181 (2002), accessed 12/4/2025, https://doi.org/10.5089/9781451859201.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.

Subject: Emerging and frontier financial markets, Financial crises, Financial markets, Financial sector policy and analysis, Financial services, Moral hazard, Securities markets, Yield curve

Keywords: Africa, Asia and Pacific, crisis lending, crisis loan, crisis period, crisis probability, crisis-preventing effect, Emerging and frontier financial markets, emerging market, financial crises, financial crisis, Global, international crisis, international lending, investor risk, issue decision, issue spread, Moral hazard, No. country, No. of period, null hypothesis, Russian crisis, Securities markets, short-term debt, sovereign debt, WP, Yield curve

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