IMF conditionality as a screening device

A theoretical model is developed in which both buybacks and the adoption of an IMF programme can be used as screening devices which enable a creditor to discriminate between debtor countries which are willing to use debt relief in order to invest and repay and countries which are not. Asymmetric information is assumed. This problem can be solved if the country has su¢cient resources to engage in a debt buyback and so gain the debt relief. When the country is credit constrained (which seems more plausible), an alternative screening mechanism is to undertake an IMF programme in return for debt reduction and possibly an IMF loan. Since the inception of the developing countries debt crisis in 1982, agreement to follow an IMF approved programme has frequently been a formal prerequisite for a country to bene…t from debt relief and rescheduling negotiated through both Paris and London clubs. In particular, the Brady Plan deals were contingent on a satisfactory macroeconomic adjustment programme, typically in the form of an IMF stabilisation agreement.1 The Brady deals involved a combination of an IMF agreement and debt and debt-service reduction from the banks. Considering the total amount of debt reduction (about 15