Research Insights: Why Are Preferred Creditors Preferred?

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.