Creditors are more willing to lend and at lower rates, reassured by the
IMF's default-staving safety net. Conversely, the IMF's refusal to
assist Russia in 1998 and Argentina this year - should reduce moral
hazard.
The IMF, of course, denies this. In a paper titled "IMF Financing and
Moral Hazard", published June 2001, the authors - Timothy Lane and
Steven Phillips, two senior IMF economists - state:
"... In order to make the case for abolishing or drastically
overhauling the IMF, one must show ... that the moral hazard generated
by the availability of IMF financing overshadows any potentially
beneficial effects in mitigating crises ... Despite many assertions in
policy discussions that moral hazard is a major cause of financial
crises, there has been astonishingly little effort to provide empirical
support for this belief."
Yet, no one knows how to measure moral hazard. In an efficient market,
interest rate spreads on bonds reflect all the information available to
investors, not merely the existence of moral hazard. Market reaction is
often delayed, partial, or distorted by subsequent developments.
Moreover, charges of "moral hazard" are frequently ill-informed and
haphazard.
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