Contagion as a Dealmaker? The Effect of Financial Spillovers on Regional Lending Programs
IMF Working Papers, July 8, 2022
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- Contagion as a Dealmaker? The Effect of Financial Spillovers on Regional Lending Programs
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Bibliographic details
- Authors: Alexandra Fotiou, Alica Ida Bonk, Georgios Manalis
- Published: July 8, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400204937.001
Authors and publication
- Alexandra Fotiou, Alica Ida Bonk, Georgios Manalis
- July 8, 2022
- IMF Working Papers, Working Paper No. 2022/133, Issue: 133, Volume: 2022, Pages: 59
- DOI: https://doi.org/10.5089/9798400204937.001
- ISBN: 9798400204937
- ISSN: 1018-5941
Research question and scope
- Investigates how the risk of contagion (spillovers) among interlinked economies shapes borrowing conditions from regional lending institutions.
- Focuses on spillovers as a channel of bargaining power that a borrowing country can wield when seeking financial support.
- Compares lending conditions imposed by the IMF and European mechanisms.
Data and methods
- Builds and presents a new database that records:
- the dates on which official meetings took place,
- relevant statements were released,
- the timing of announcements regarding loan disbursements.
- Uses a recursive contract framework between a lender and a sovereign borrower to study lending arrangement design when accounting for spillover costs.
- Tests and validates theoretical predictions by assessing the effect of spillovers on loan disbursements to programme-countries and juxtaposing IMF and European mechanism lending conditions.
Key findings
- Announcements of future actions play a defining role in mitigating spillover costs.
- When accounting for spillover costs arising from the borrower to the creditor, the lender's optimal strategy is to back-load consumption by giving more weight to future transfers to reduce contagion cost.
- Empirical assessment supports the theoretical prediction that spillovers affect loan disbursements to programme-countries.
- Contrasts in lending conditions are observed between the IMF and European mechanisms (as a focus of empirical juxtaposition).
Subjects and keywords
- Subject: Consumption, Credit default swap, Financial crises, Financial institutions, Financial sector policy and analysis, Loans, Money, National accounts, Spillovers
- Keywords: Consumption, Credit default swap, currency-union, ESM disbursement, IMF statement, lending agreement, lending condition, lending program, lending terms and conditions, loan announcement, loan disbursement, Loans, Regional lending mechanisms, spillover cost, spillovers
IMF Working Paper No. 2022/133
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- Working Paper