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Article: Moral hazard: fact or fiction? (Letters to the Editor).(Letter to the Editor)
- Article from:
- Finance & Development
- Article date:
- December 1, 2002
CopyrightCOPYRIGHT 2002 International Monetary Fund. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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In "Moral Hazard in IMF Loans: How Big a Concern?" (September 2002), Kenneth Rogoff argues against his own theory by saying that the moral hazard in IMF loans is not a big concern. He bases this on the fact that the vast majority of IMF loans are repaid.
However, a more sophisticated theory of moral hazard goes like this. Debtor countries get into repayment difficulties because they expect the IMF to bail them out in the event of trouble. Because IMF approval acts as leverage to raise private capital, debtors make sure that they repay IMF loans first. So, when trouble arises, private creditors are left holding the baby while the IMF comes out unscathed.
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