Dr. Cordella brings a wealth of experience in development economics, having worked in academia and at both the IMF and the World Bank in various research and operational capacities, including as the Deputy Chief Economist for Latin America. From his vantage point, Cordella walks us through sovereign debt, the role of International Finance Institutions (IFIs), what IFIs should and should not do to protect their seniority, and the future of IFIs in the evolving international finance architecture.

Why do countries borrow? Cordella argues that the reasons are not so different from the ones behind individual borrowing: to smooth consumption (if the country is hit by a shock, for example), to invest (for instance, in infrastructure), or for splurging (like buying a fancy presidential airplane). However, while courts may force individuals to repay their debts, it is quite difficult to force countries to do so. So why do countries repay (or attempt to repay) their debts when the creditors' ability to seize sovereign assets is so limited? Cordella argues that when a country chooses to default on its debt, the consequences can be severe, including economic disruption, lack of international market access, and political turmoil, often the most damaging one–especially for the politicians in power.

Moving to IFIs, the reason they can help countries in difficulty is that they can lend at below market rates, they can lend when nobody else does, and they can do so because they are typically paid back when other creditors are not. In other words, they enjoy preferred creditor treatment (PCT). Absent any true legal obligation behind IFIs' seniority, what is the reason countries continue servicing their IFI loans, when they are unable/unwilling to service their commercial or bilateral debt?

The reason, Cordella argues, IFIs maintain PCT lies in their unique ability to lend at a fixed rate–close to or below the risk-free one depending on countries' per capita income, but not on their riskiness–, and to restrict the amount of lending available at such a rate, so that countries will always repay to maintain access to the same precious loans in the future. This also implies that asking IFIs to "share the burden" in a debt restructuring would destroy their ability to lend risk free, and thus their value added. But this relies on a common understanding of IFIs' seniority role, which is "codified" in IMF's lending into arrears policies, and relies on the cosy relationship between IFIs and the Paris Club, which guarantees creditor governments' willingness to support IFIs' financing by providing necessary debt relief on a consensual basis.

But what happens when a new bilateral creditor (China) emerges, who has geo-political interests that compete with those of the traditional donor community? Can the G20 become the forum in charge of coordinating international rescue plans in times of crises? Will China join the Paris Club and contribute to an orderly restructuring of developing countries unsustainable debt? The signals arising from the DSSI and the Common Framework are mixed, and there are a number of obstacles that may hold back the emergence of a new consensual approach to deal with debt crises. Among these, the blurry line between commercial and official Chinese lending and its overall lack of transparency, the underrepresentation of China in the Bretton Woods Institutions, or the fact that international aid may be perceived as an additional instrument to grab scarce natural resources.

In any case, Cordella concludes, the idea that we can have a healthy competition between IFIs (e.g., AIIB v WBG or ADB v NDB) or between official lenders (e.g., Paris Club v China) is a fallacy. Indeed, competition among IFIs will destroy their preferred creditor status, which is needed to fulfil their mandate; the same will competition about official lenders.

Hence, China and the West should decide between collaborating, competing, or splitting the world in areas of aid influence. Competition is the more nefarious outcome, but cannot be ruled out, at least transitorily, especially if the different players are trying to position themselves in stronger footholds for the years to come.


Event Materials:


Full Audio:

International Economics Series

hosted by Professor Michael G. Plummer


SAIS Europe students, faculty, staff, and guests are allowed to attend in person at SAIS Europe, via B. Andreatta 3, Bologna. To participate online, please register for the webinar.

Tito Cordella is the Vera and Stefano Zamagni Chair in Development Economics at SAIS Europe.

Cordella started his professional career as an academic, teaching at Pompeu Fabra University in Barcelona and at the University of Bologna. He then had a long stint at the Bretton Woods Institutions where, alternating operational and research activities, he gained extensive policy experience on a wide range of issues (monetary and fiscal policies, financial crises, banking, finance, growth, sovereign debt and debt restructuring, financial products, among others). At the IMF, Cordella was a member of the Asian crisis team and then joined the Research Department where he focused on how to reform the international financial architecture. At the World Bank, he was the Brazil Chief Economist, the Deputy Chief Economist for the LAC region, and an adviser to the World Bank Chief Economist. He is an honorary member of LACEA, a member of the LTI@UniTO Scientific Committee, and an advisory editor of the Latin American Journal of Central Banking.

Cordella has published widely in banking, international finance/development, and trade. An Italian national, he holds a PhD in Economics from the Université Catholique de Louvain, Belgium (European Doctoral Program).