Creditors’ Seniority and Sovereign Risk

Abstract

We provide new evidence on the de facto seniority structure of sovereign debt. Using a measure of the Relative Percentage in Default (RPID) by creditor group for 119 low-income and emerging market countries over the period 1980–2022, we show that debt owed to the IMF and the World Bank is, on average, the most senior, followed by debt owed to official bilateral creditors. Private creditors, notably bondholders and commercial banks, are on average junior to official creditors, with commercial banks being the least prioritized group for repayments. Beyond characterizing the seniority hierarchy, our empirical analysis shows that creditor composition has economically meaningful implications for sovereign risk. Using an instrumental variable estimation, we show that IMF credit outstanding as a share of GNI is robustly and negatively associated with the probability of a debt crisis. This stabilizing effect weakens progressively as debt stocks rise, suggesting that the IMF's crisis-preventing role diminishes in situations of severe debt overhang. Turning to sovereign borrowing costs, we find that IMF lending is negatively associated with sovereign bond spreads.