Sovereign lending after debt relief

Abstract

Debt relief has been controversial due to its potential to reward irresponsible behavior by debtor governments. Recently, however, observers note that debt relief might also induce irresponsible behavior by creditor governments. A collective action problem might exist, where creditor governments target new loans to developing countries that just received debt relief from a different creditor. I investigate if debt relief affects decisions by creditor governments to provide new loans. Additionally, I analyze which types of creditor governments are more likely to lend to recipients of debt relief. I find that China and other emerging creditors are not more likely to lend to recipients of debt relief than western creditor governments. Instead, creditor governments of smaller economies are more likely than those of larger economies to free-ride on debt relief provided by other lenders. If states lend to gain influence, larger lenders will typically crowd out smaller creditors. However, if a debtor state just received debt relief and is therefore viewed as a greater risk, small creditors may see an opportunity to gain influence by providing a loan that no other state wants to provide.

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