Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum

16 Pages Posted: 13 Jan 2017

See all articles by Sven Steinkamp

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: November 2016

Abstract

During Europe’s sovereign-debt crisis, interest rate spreads have been highly correlated with the share of multilateral loans that were considered senior to private markets. As both variables are potentially endogenous, we follow two different approaches to analyze the direction of causality. First, we use a set of IV regressions where the differences between sovereign ratings serve as instruments. Second, we analyze a new panel-survey dataset on seniority and interest rate expectations. In both approaches, we find evidence for the seniority conundrum – i.e., a positive impact of multilateral loans on interest rate spreads.

Keywords: government bond spreads, creditor seniority, recovery rate, interest rate, sovereign debt

JEL Classification: F340, G120, H810

Suggested Citation

Steinkamp, Sven and Westermann, Frank, Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum (November 2016). CESifo Working Paper Series No. 6225. Available at SSRN: https://ssrn.com/abstract=2898147

Sven Steinkamp (Contact Author)

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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