Financial Stability Paper No. 4
By Paul Bedford and Gregor Irwin
Episodes of sovereign default are typically associated with significant economic costs. The International Monetary Fund can help to mitigate these costs in a variety of ways, including by lending into arrears. Careful design of the broad policy framework governing the Fund’s involvement can help to ensure it has the maximum beneficial impact, without distorting the incentives of either the defaulting country or its creditors. This paper aims to identify some of the issues that are relevant to the design of such a framework, and which might helpfully be considered as part of the forthcoming review of the Fund’s lending-into-arrears policy.