Ponente: Aitor Erce (Universidad Pública de Navarra)

Título: A Theory of Conditionality: evidence from the European debt crisis

Abstract: Utilising a unique dataset with condition-level information for euro area financial assistance programmes, we show that the compliance assessment process is better understoodas a self-confirming process: creditors’ discretion on which, and when, conditions they assess, taking into account their likelihood of fulfilment, boosts debtors’ compliance with loan conditionality. This behaviour facilitates the “successful” implementationof programmes, even if a large fraction of conditions are not fulfilled or even ever assessed. Such a self-confirming process opens the possibility for time-inconsistent, or even ex-ante inefficient, decisions, as our econometric analysis suggests occurred during the European sovereign debt crisis. More generally, we show that failing to account for the endogenous timing of creditors’ evaluations can introduce biases in the analysis of the effect of compliance with loan conditionality. We provide a number of lessons on how to improve the design of official lending so as to minimize inefficiencies.