Research Insights: Why Are Preferred Creditors Preferred?

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Peer Reviewed icon Peer Reviewed
Date issued
Dec 2020
Subject
Sovereign Default;
Interest Rate;
Organization Realignment;
Emergency Funding
JEL code
F34 - International Lending and Debt Problems;
O19 - International Linkages to Development • Role of International Organizations;
H63 - Debt • Debt Management • Sovereign Debt;
P33 - International Trade, Finance, Investment, Relations, and Aid
Category
Catalogs and Brochures
If sovereign borrowers restructure commercial debts, they are still expected to repay preferred creditors such as the IMF, IDB and the other main multilateral development banks (MDBs) in full. Surprisingly, while this status is almost always respected, it is a market custom and does not appear in legal documents. Moreover, existing scholarly work does not provide a justification for why it is so enduring. We found that private and preferred lending can coexist and that it can be in the interest of countries to always repay preferred lenders, as the benefit of future access to credit outweighs the cost of repayment. This explains the persistence of the preferred status.