Basic analytics of multilateral lending and surveillance

Abstract

I analyse whether multilateral lending may be justified in a world of global capital markets if multilaterals have an informational advantage over lenders in the market for sovereign debt. I show that the adverse selection problem in this market may be solved through cheap-talk provided the multilateral agency does not care too much about borrower country welfare. However, when lending is unconstrained the private information of the multilateral will be revealed whatever the relative weighting of welfare and lenders’ profits. In contrast, restricted multilateral lending may worsen the problem compared to a situation where the agency plays a purely informational role.