Preferred and non-preferred creditors

International financial institutions (IFIs) generally enjoy preferred creditors treatment (PCT). Although PCT rarely appears in legal contracts, when sovereigns restructure bilateral or commercial debts they normally pay IFIs full. This paper presents a model where creditor, such as an IFI, that can commit to lend limited amounts at the risk-free rate and refrain from lending into arrears is always repaid adds value. The analysis suggests market lenders both enhance welfare, even if banning borrowing sometimes be optimal. To maintain their status, should offer low cost financing volumes are consistent with countries' incentives repay bad states. not differentiate interest rates according risk participate restructuring of debt. • In sovereign debt defaults, countries expected IMF multilateral development banks Arrears on payments rare, restructured Preferred creditor status does appear documents, previous work provide clear justification for why it so enduring our model, defaultable private official coexist, beneficial, country's lender