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We investigate how Covid-19 affects the emerging market (EM) bonds by analysing, on a standalone basis, investment grade (IG) and high yield (HY) debt per type of issuer. We document evidence that ...

The economic harm being caused by the novel coronavirus may soon result in multiple sovereign debtors moving into default territory, but the existing playbook for dealing with multi-sovereign emerging market debt crises is blank. Currently, the only way to deal with a debt crisis is to carry out protracted country-by-country and contract-by-contract negotiated workouts. Expert groups are attempting to design a mechanism to run multiple sovereign debt workouts simultaneously but any design will take time to configure and get international buy-in. This article sets forth some options to provide temporary legal protection to debtor countries while they are diverting resources to respond to the Covid-19 pandemic. This is the notion of ‘legal air cover’. The options we propose involve ex-post state intervention in debt contracts and come with risks, but we show that in the case of Greece, where such an intervention was necessary in 2012, there were no negative spillovers on periphery eurozone debt markets associated with the Greek ex-post modification of contract terms.

We apply wavelet analyses to study the impact of COVID-19 pandemic on the performance of emerging market bonds, in both investment grade and high yield ranges of creditworthiness Our results show varying level of coherence ranging from low, medium and high between the Coronavirus Media Coverage index and the price moves of the emerging market USD-denominated debt We attribute the intervals of low coherence levels to the diversification potential during a systemic pandemic such as COVID-19 of investments in bonds issued by developing economies We document differences in patterns exhibited by various indices describing behaviour of option-adjusted spreads and total returns as a function of credit quality of issuers form emerging market economies We report well-defined zones of the regime switching between the lead and lag roles of the emerging market bonds vis-a-vis the media coverage

Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall cost of debt. We emphasize that risk premium manipulations via capital controls are only optimal from the perspective of the individual emerging market, but not from a global perspective. This suggests that the use of capital controls may impose costs in an international context.

Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years. Since 2010, emerging and developing economies have experienced another wave of historically large and rapid debt accumulation. Similar past debt buildups have often ended in widespread financial crises in these economies. This paper examines the factors that are likely to determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. It reports two main results. First, the rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. Second, policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. The post-crisis debt buildup has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt-related transactions are transparently reported.

The economic harm being caused by the novel coronavirus may soon result in multiple sovereign debtors moving into default territory. But the existing playbook for dealing with multi-sovereign emerging market debt crises is blank. The only debt crisis scenario we know is protracted country-by-country and contract-by-contract negotiated workouts. As of this writing, expert groups are working on the design of a mechanism to run multiple sovereign debt workouts simultaneously. Those designs, however, will take time to configure and get international buy-in. This paper sets forth some options to provide temporary legal protection to the debtor countries in the meantime; while they are in need of diverting resources toward Covid amelioration. This is the notion of "legal air cover". The options we propose involve ex post state intervention in debt contracts. They are extreme and may come with risks. But we show that in the case of Greece, when intervention such as we envision was necessary, there were no negative spillovers on periphery Eurozone debt markets associated with the Greek ex post modification of contract terms.

We extend the analysis of systematic investment approaches to emerging market (EM) fixed income. We focus on hard currency bonds issued by emerging sovereign and quasi-sovereign entities. We find that systematic exposures linked to carry, defensive, momentum, and valuation themes are well compensated and lowly correlated in EM markets. A transaction-cost and liquidity aware long-only portfolio generates an Information Ratio above 1. We further show that excess of benchmark returns for a broad set of EM managers are (i) largely explained by passive exposures to EM corporate credit excess returns and EM local currency returns, and (ii) have nontrivial macroeconomic exposures (growth, inflation, volatility, and liquidity). A systematic approach to EM debt may be a powerful diversifier. TOPICS:Emerging markets, currency Key Findings • We find that a systematic approach to active risk taking ‘works’ in emerging market (EM) fixed income. Exposures linked to carry, defensive, momentum and valuation themes have been well compensated in EM markets. • We further find that excess of benchmark returns for incumbent EM managers contain a lot of traditional beta and significant macroeconomic sensitivities. • There is potentially a large diversification benefit for a well-crafted systematic long-only portfolio of EM bonds.

Non-US dollar denominated external emerging market debt issuance in euros, yen, and sterling has grown substantially in recent years. This article is the first study to explore how non-dollar external emerging market bonds violate covered interest rate parity relative to their dollar-denominated external emerging market debt counterpart bonds for a given country. Such mispricing in the post-Great Recession era creates arbitrage opportunities for investors and suggests that emerging market country policymakers could create fiscal savings by instead issuing external sovereign debt in dollars more cheaply (versus non-dollar developed world currencies like euro, yen, and sterling) and swapping the proceeds to non-dollar currencies with currency forward and spot transactions. Such hypothetical fiscal savings from switching to dollar funding collectively are estimated to be more than $1 billion annually. TOPICS:Fixed income and structured finance, exchanges/markets/clearinghouses, emerging markets Key Findings • This article is the first study to explore how non-dollar external emerging market bonds violate covered interest rate parity relative to their dollar-denominated external emerging market debt counterpart bonds for a given country. • Such mispricing creates investment opportunities and suggests that by instead more cheaply issuing external sovereign debt in dollars (versus non-dollar developed world currencies like euro, yen, and sterling) and swapping the proceeds to non-dollar currencies, emerging market country policymakers could create substantial fiscal savings from switching to dollar funding.

Using the Emerging Market Debt Crises of the late 1990s, a shock that directly impacted some U.S. banks but not their domestic borrowers, we study the causal impact of lender health on covenant-violating borrowers. Using difference-in-differences, we find that banks exposed to the crises become relatively more likely to be stringent with covenant violators. Such stringency has real effects, as covenant violators become more likely to suffer a distressed delisting if their lenders are crisis-exposed. We also find effects for lender health on borrower investments, but these effects are not specific to covenant-violating borrowers.

Contrary to widespread expectation, emerging market debt renegotiations in the era of bond finance have generally been quick and involved little litigation. This paper presents a model that rationalizes some of the initial fears and offers two interpretations for why they did not come true. First, when debt exchange offers are sufficiently attractive relative to the risk faced by holdouts, full participation can be an equilibrium. Second, legal innovations such as minimum participation thresholds and defensive exit consents helped coordinate creditors and avoid litigation. In this regard, exit consents are shown to have similar effects on creditor coordination as collective action clauses (CACs). Unlike CACs, exit consents can be exploited to force a high haircut on creditors, but the ability of creditors to coordinate to block exit consents limits overly aggressive use.

This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920-1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978-2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras, averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We then analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves signicantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings. (JEL: E6, F3, N0 and H6)

Emerging market debt offers multiple opportunities for investors across credit categories, interest rates, and currencies. From a credit perspective, it is often the case that dollar sovereign bonds—and, in some cases, quasi-sovereign bonds—offer the best value. When considering interest rates and currencies, cross-sectional approaches are useful because they mitigate the effects of duration and dollar timing.

1. Global Governance and the Politics of Crisis 2. Crisis is Governance: Sub-prime, the Traumatic Event, and Bare Life 3. IMF Surveillance in Crisis: The Past, Present and Future of the Reform Process 4. Post-crisis Reform at the IMF: Learning to be (Seen to be) a Long-term Development Partner 5. Global Trade Governance and the Challenges of African Activism in the Doha Development Agenda Negotiations 6. Multilateralism in Crisis? The Character of US International Engagement under Obama 7. Each Time is Different! The Shifting Boundaries of Emerging Market Debt

The Saudi Tadawul stock market boom and crash was followed by the global financial crisis. Higher oil prices in its aftermath up to 2014 produced budget surpluses, repayment of all government debt, rising foreign exchange reserves, demand-push inflation and revaluation pressure on the currency peg. The non-oil economy failed to diversify and when oil prices fell Vision 2030 was announced in 2016. The global financial crisis led to a devaluation panic but the banking system was largely unaffected due to strong fiscal spending keeping the economy strong. The Saad-AHAB bankruptcy exposed undisciplined banking practices. SAMA shifted investments toward emerging market debt and equities. The home mortgage market was developed. After the oil price fall, government debt was issued again. Devaluation returned to the agenda.

Emerging market debt as an asset class has grown significantly over the past two decades. Relative to developed markets, higher growth rates, favorable trends in debt sustainability and fiscal dynamics, and supportive valuation and technicals provide a compelling investment thesis for the asset class. But there are risks, with the two major risks being the emerging markets’ electoral cycles and a sustained rise in US Treasury rates.

This article investigates how credible commitment evolves when sovereign states borrow jointly. In 2006, Venezuela and Argentina issued a package of ‘joint’ sovereign bonds, which were later tradable separately. Despite the fact that Venezuela did not explicitly guarantee the Argentine component of the bond, this paper shows through a series of GARCH models that the financial markets have traded the bond on the basis of news about Venezuela's politics, macro economy and its commitment to the bond and other regional integration projects. This is because the bond was embedded in a more extensive set of financial and political relationships between the two countries, and served as a commitment mechanism, enhancing Argentine credibility. The article demonstrates that bilateral economic and political relationships can serve as a credible commitment device in the absence of changes to domestic institutions or longer-term re-establishment of reputation.

In a setting where the lender and the borrower have heterogeneous beliefs about the likelihood of a disastrous shock to the borrower's economy, we study the debt contract that defaults at the occurrence of that shock, as proposed by Barro (2006) . We find that a higher belief by the lender compared to the borrower can lead to countercyclical interest rates and credit spreads in non-default times, and to an increase in the borrower's indebtedness in default times, as often observed in emerging market economies. When calibrating the model to prices in the credit default swap market, we show that heterogeneous beliefs can account for more than 40% of the variation in CDS spreads associated with shocks to the borrower's economy in non-default times.

International audience; ETFs and index funds have grown at very rapid rates in recent years. Originally launched totrack some large liquid indices in developed markets, they now also concern less liquid assetclasses such as emerging market bonds. Illiquidity certainly affects the quality of the replication,and in particular, liquidity might increase the tracking error of any index fund, i.e., thedifference between the fund and the benchmark returns. The tracking error is then the firstcharacteristic that investors consider when they select index funds. In this paper, we beginfrom the CDS-bond basis to simulate the tracking error (TE) of a hypothetical well-diversifiedfund investing in the emerging market bond universe. We compute the CDS-bond basis andthe tracking error for 9 emerging market sovereign entities: Brazil, Chile, Hungary, Mexico,Poland, Russia, South Africa, Thailand and Turkey. All of these countries are included inthe MSCI Emerging Market Debt in Local Currency index. Our sample period ranges fromJanuary 1, 2007 to March 26, 2012. Using a Regime Switching for Dynamic Correlations(RSDC) model, we show that the country-by-country tracking error is reduced by the diversificationat the fund level. Moreover, we show that this diversification effect is less effectiveduring crisis periods. This loss of diversification benefits is the main risk of index funds when they are designed to create a liquid exposure to illiquid asset classes

Recent decades have witnessed not only a series of financial crises in both developed and developing countries, but also significant changes in the composition of overall debt. The global financial crisis of 2007–2009 highlighted the predicaments caused by rapidly rising levels of household debt, most famously in the form of so-called subprime loans, extended to riskier borrowers whose credit history and capacity to repay these loans was thought to be “less than ideal”. Yet little is known about household debt levels in emerging market economies. Indeed, if we move away from (largely government) debt to foreign creditors, little is known at all about the dynamics of emerging market debt in general and the politics they imply. By focusing on so-called deleveraging episodes after crises, this article investigates the shifting boundaries of emerging market debt between the 1980s international debt crisis and the global credit crunch in the late 2000s. In so doing, it traces changes in overall debt compositio...

Using a panel of 46 emerging market economies from 1997 to 2008,this paper investigates the key determi-nants of country risk premiums as measured by sovereign bond spreads.Unlike previous studies,the resultsindicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels ofpolitical risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal con-solidation narrow credit spreads,especially in countries with high initial public debt levels.The compositionof fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remainssustainable and the fiscal deficit does not worsen. 1. Introduction Notwithstanding recent developments, financial markets’ perception of credit risks inemerging economies has sharply improved over the last decade. The spread of thecomposite Emerging Market Bond Index Global (EMBIG) calculated by JP Morgantightened by more than 500 basis points between mid-2002 andAugust 2007 (Baldacci,2007). This downward trend was partially reversed during the 2007–08 subprime-induced financial crisis (IMF, 2008), particularly as spillovers spread from majorfinancial centers to emerging markets during the last quarter of 2008. However,EMBIG spreads have recently fallen back to pre-crisis levels (e.g.prior to the collapseof Lehman Brothers in September 2008) as financial markets rebounded following theactions taken by the major economies to repair their banks’ balance sheets and helpspur demand. Overall, the downward trend in bond spreads suggests that a lowerpremium is required to protect investors in emerging market economies againstcountry-specific and asset-class-wide risks than earlier in the decade.Also, the cost ofbuying protection against defaults of sovereign emerging market debt instruments, asmeasured by the spreads of credit default swap (CDS) derivative instruments, felldrastically over the last five years despite the recent cyclical uptick.The literature has attributed the long-term tightening of emerging market spreads tothree factors: (i) sound macroeconomic policies that brought inflation under control(including through more independent monetary authorities),reduced output volatility,and significant reductions in public and external debt (Ciarlone et al.,2007);(ii) highercommodity prices and favorable liquidity conditions that lowered risks and resulted inlarge capital flows to these countries (Hartelius et al., 2008); and (iii) development of

Although small as an asset class, emerging market debt offers interesting and varied return possibilities relative to other alternatives. At the same time, risks must be viewed as a collection of risks rather than one risk factor for the whole asset class. The author discusses a methodology for determining whether investors in emerging market debt are being adequately compensated for all of the risks they are taking.

This paper studies the determinants of emerging market spreads, and thus of the cost of borrowing for emerging market sovereigns, using recent data from JP Morgan's EMBI+ index for a panel of 19 countries. Controlling for traditional spread determinants, we focus on three additional factors whose importance is suggested by recent work: external shocks, the balance sheet effect of real devaluations, and the degree of current account leverage. We find clear and strong evidence that the variables in the foregoing categories have an economically and statistically significant relationship with spreads. In particular, we find a major role for the terms-of-trade volatility and the level of current account leverage in explaining spread variation. The result on current account leverage establishes an important link between a factor shown to make countries more vulnerable to sudden stops of capital flows, and the premium required by international investors on their foreign debt. JEL classification codes: C33, F34

We investigate the incremental role of emerging market debt and corporate bonds in internationally diversified government bond portfolios. Contrary to earlier results, we find that international diversification among government bonds does not yield significant diversification benefits. This result is obtained using mean-variance spanning and intersection tests, with restrictions for short sales, both for currency unhedged and hedged international developed market government bonds. Currency hedged international corporate bonds in turn do offer some diversification benefits, and emerging market debt in particular significantly shifts the mean-variance frontier for a developed market investor. Since especially unconstrained mean-variance spanning and intersection tests can indicate significant diversification benefits, but lead to frontier portfolios with extreme weights, we also consider some ex-ante global government bond portfolio strategies. We find that passive global benchmarks such as GDP-weighed government bond portfolios perform quite well within developed countries.

As the global financial crisis has intensified, even such asset classes as emerging market debt that are removed from the epicenter of the crisis have come under pressure. Decoupling is untenable, but emerging market debt is likely to be supported, at least on a relative basis, by the potential of emerging market economies to continue outpacing those of the developed world. In considering the outlook for emerging market debt and its position in a well-diversified portfolio, analysts need to recognize that it has experienced important changes in the past several years. In particular, emerging market debt should now be viewed as consisting of three distinct asset classes: (1) dollar-denominated debt, (2) local currencies, and (3) local interest rates.

We study the concept of risk appetite, that is investors’ willingness to buy risky assets. Market players and researchers have tried to find a proxy for it, notably by means of spreads in high yielding markets like credit or emerging markets. However, these measures might be biased because they hinge on series of prices that include market movements due to the re-pricing of both systemic and specific risks. Being macro factors that affect all the assets in the universe, risk appetite and risk aversion can only produce systemic risk re-pricing. We apply a methodology to correct this bias. We analysed emerging market debt capital markets and compute a systemic risk only indicator that enables one to ascertain more precisely periods in which risk appetite might have driven market returns. We find that from the end of 1997 to 2004 only about 30 per cent of the return of the EMBI+ might have been due to changes in risk appetite.

I. INTRODUCTION The global financial integration of emerging markets has further accelerated over the past decade, as underlined by marked increases in the size of capital flows to many of these countries and the magnitude of their external asset and liability positions (International Monetary Fund [IMF], 2005a). A rapidly growing literature has concentrated particularly on three broad areas of implications these trends have for emerging market economies. One important strand has examined the effects of increased financial openness for economic growth (e.g., Edwards, 2001; Henry, 2003). Another key area of interest has been the impact of rising capital flows on the development of the financial sector (e.g., Chinn and Ito, 2006; Mishkin, 2006). Finally, the potential implications for macro-economic volatility and the exposure to financial crises have been subject to several studies (e.g., Feldstein, 2003; Prasad et al., 2003). Less recognized, however, are the important fiscal implications of the further financial integration of emerging markets. The latest push in financial globalization has gone in tandem with a marked improvement in market access for emerging market governments (IMF, 2004, 2005b). This has helped emerging markets as a group sustain a substantial increase in their nominal public external debt burden over the 1990s and particularly since 2000 and an increase in the share of bonds in the debt stock to levels higher than ever in the past three decades (World Bank, 2005). These trends are clearly visible in Figure 1, which shows public external debt relative to gross domestic product (GDP) and the nominal amounts outstanding of the three constituencies of this debt for four regional groups of emerging markets (see Section III for the country composition). While debt-to-GDP ratios have declined, the larger nominal debt burden, and particularly the rising share of bond debt, increases emerging markets' exposure to external financial conditions. [FIGURE 1 OMITTED] Larger external financing, particularly direct borrowing from the financial markets, implies a rising pass-through from global financial conditions to emerging markets' public finances--for better or worse. Recently, it was mostly for the better: during the first half of this decade, financial conditions were extraordinarily benign, with a weak U.S. dollar and record-low global interest rates. The rapid narrowing of yield spreads on emerging market debt during this period may have been partly due to improved fundamentals and structural changes in emerging market debt (IMF, 2005b). However, there is empirical evidence that market conditions, namely abundant liquidity and high-risk appetite, were at least as influential as improved fundamentals (IMF, 2004). In this sense, also these spreads can be regarded as largely exogenous for many emerging markets. Despite the likely importance of the impact of external financial conditions on fiscal performance in emerging markets, there is no systematic evidence. This may be partly due to the lack of a consistent framework for the analysis of the effects of financial conditions on budgetary positions. Moreover, there may be a perception that the readily available data on emerging market government debt positions does not allow such an analysis. This article argues that headline fiscal performance can be seriously influenced by the effects of financial conditions and that ignoring these effects can entail misleading conclusions about the soundness of the underlying budgetary positions. It makes a methodological contribution by providing a consistent framework for the analysis of the effects of financial conditions on fiscal performance--adding to the toolkit of analysts of fiscal policy provided by the literature on the measurement of the fiscal deficit, for example, Blejer and Cheasty (1993)--and by demonstrating that the readily available data allow at least broad estimates of these effects for a large number of emerging markets. …

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.

This paper introduces a new approach to pricing sovereign risk based on sovereign credit default swap (CDS) spreads. We estimate a dynamic market-based measure of sovereign risk and use it to decompose sovereign CDS spreads into expected losses from default and the market risk premia required by investors as compensation for default risk. Using a dynamic panel data model, we find that country-specific fundamentals primarily drive sovereign risk whilst global investors' risk aversion drives time variation in the risk premia. Consistent with this, we also find that the sovereign risk premia is more highly correlated than sovereign risk itself within emerging market regions. These results help us to explain the remarkable narrowing of emerging market spreads between 2002 and 2006 and to understand the pricing mechanism and channel of contagion for emerging debt markets.

Emerging market debt continues to evolve as an asset class. Rising credit quality among emerging market issuers and declining levels of issuance have driven spread tightening. Moreover, the growing issuance of local-currency-denominated debt creates inefficiencies that can be profitably exploited.

Countries that cannot attract foreigners to invest in their local currency bonds run the risk of currency mismatches that can result in painful crises. We analyze foreign participation in the bond markets of over 40 countries. Bond markets in less developed countries have returns characterized by high variance and negative skewness, factors that we show are eschewed by U.S. investors. While results based on a three-moment CAPM indicate that it is diversifiable idiosyncratic risk that U.S. investors shun, our analysis suggests that countries can improve foreign participation by reducing macroeconomic instability.

The paper finds a moderate evolution in public debt ratios since debt relief among heavily indebted poor countries (HIPC) and multilateral debt relief initiative (MDRI) recipient countries in Sub-Saharan Africa, with certain exceptions. For eight countries the authors find rapid rates of debt accumulation, which can return them to pre-HIPC debt levels in only a few years. Short-term domestic debt has, despite early fears, in general not filled the borrowing space created by debt relief. However, external debt accumulation on commercial terms in some cases presages repayment spikes, which may combine with short-term domestic obligations to amplify refinancing risk and cause abrupt reductions in public spending, with damaging consequences for development. Finally, despite reduced debt, African economies continue to be commodity dependent and prone to shocks. As global interest rates and commodity prices revert to historically more customary levels, these countries should remain prudent: avoid tax-base erosion, prevent large recurrent spending hikes, and invest wisely in growth, by executing projects effectively to enhance infrastructure. These fiscal fundamentals will be as important for debt sustainability as how much is borrowed and on which terms.

Emerging market debt is a more stable asset class now than it was 10 years ago. Improvements in macroeconomic fundamentals and political stability make this a safer market for diversification and yield and less prone to event risk. As spreads on sovereign debt denominated in U.S. dollars have narrowed, investors have sought higher yields offered by local-currency-denominated debt, thereby displaying an appetite for currency risk. Sovereign issuers are showing a preference for raising funds in their own markets, and the commensurate demand from foreign investors has led to the development of new performance indices for local currency bonds.

This study estimates a model of banking company equity returns taking into consideration book value and market value measures of their exposure to emerging markets debt. In this estimation, general systematic market factors, such as the rate of return on the S&P500 stock index and yields on a constant maturity 5-year Treasury note, are held constant such that the exposure variables are accounting for effects due to banks’ exposure to emerging market debt. The results, although not uniform among banking companies, support the hypothesis that the extent of exposure to emerging market debt are factored into the valuation of banking company equity contemporaneously. The inclusion of a market value indicator adds to the explanation of equity returns of some banks. It is also clear that knowing the extent of the exposure on a book value basis is important information alone that may allow investors to take account of or evaluate the effects of changes in banking company equity valuation from LDC debt exposures. We also perform an event study for three major debt crises to determine whether the market recognizes the effects of these events on bank valuation. The event study results show that there is little information from identifying the time period of the crises on banking company equity returns. Explanations for this are that the information of these possible crises has been embedded in bank changes in exposure and that the market valuation of the emerging market debt is already accounted for by our model.

Creditors may face many challenges in emerging market debt restructurings, and they may find themselves at a distinct disadvantage in negotiations with debtors and their controlling shareholders. This article provides an overview of potential opportunities and pitfalls for creditors in such restructurings. It discusses potential opportunities that may arise in the course of a restructuring that could give creditors additional leverage vis-a-vis the debtor and its controlling shareholders. It also discusses potential pitfalls for the creditors that could have the effect of enhancing any existing advantages and leverage enjoyed by the debtor and its controlling shareholders.

What role should the extended sectors of the U.S. bond market—specifically high-yield bonds (HY) and emerging market debt (EMD)—play in a well-diversified portfolio of a U.S.-based institutional investor? Should these sectors be considered separate asset classes? At what point should the decision be made on whether to allocate assets to HY and EMD, and what are the important considerations that should guide the decision? An answer to these questions tests the relationships between these sectors and the major asset classes customarily held by U.S. institutional investors.

With clients looking for incremental yield, higher returns, and more diversification, core-plus fixed-income managers are being given increasing leeway over the types of instruments and maximum allocations to various sectors. Although core plus has tended to experience some pain roughly every four years, the style has indeed added value over the last decade and a half. Despite occasional suppositions otherwise, the evidence indicates that core-plus managers are relatively active in tactically adjusting their portfolios. And although the "plus" sectors typically offer low correlations with equities, one needs to be willing to tolerate the fact that excess returns of the core-plus portfolio may at times experience high correlations with equities, credit events, and emerging market debt.

Approached in thoughtful and systematic ways, both domestic high-yield and emerging market debt can add value whether in a core-plus or a stand-alone mandate. With expected returns on traditional asset classes fairly low, these interesting areas are garnering enhanced attention. Daniel Evans and Mark Siegel discuss the behavior of these asset classes, the considerations that should be accounted for in evaluating them, and their views on the future for these areas.

The emerging markets of Asia, Latin America, Earstern Europe, the former Soviet empire, and elsewhere continue to be exciting places to be—exciting for creditors that is. Many high-profile defaults and restructurings tend to be the norm rather than the exception. This article explores the ways that creditors can test the waters with debtors, to better understand the chances for success in obtaining an effective operating plan to save the affected entity. Seven specific actions are noted to alert creditors to the probability of good working relationships with debtors.

Economic theory and evidence from a variety of debt markets shed light on current reform proposals concerning emerging market debt. Debt markets, including the U. S. municipal bond market, generally function best when the rights of creditors are protected most effectively. Since current IMF reform proposals significantly emasculate creditor rights, they are likely to have an adverse effect on the flow of new funds to sovereign borrowers.

Emerging market debt has consistently outperformed emerging market equities, and this trend is likely to continue. Although the emerging market debt asset class has a positive secular trend, the cyclical outlook is challenging. In approaching this asset class, investors who focus on the fundamentals should be able to identify enough quality credits to obtain significant return and downside protection.

In order for investor participation in emerging market debt to continue its recent growth, abuses of creditor rights must be curtailed. Although bondholders have contributed to the problem by failing to exert the type of vigilance necessary to keep debtors honest, even savvy bondholders are vulnerable to abusive treatment by emerging market debtors. Ultimately, bondholders must organize in order to force such improvements as stronger covenants, greater transparency, standardization of documentation, and a better framework for resolving default crises.

Post-crisis Argentina is a case study of crisis management through debt restructuring. This article examines how Argentina negotiated the external debt in the wake of the sovereign default in December 2001 and now confronts challenges posed by holdout creditors—the so called “vulture funds”. It argues that debt restructuring has put a straitjacket on the national economy, making it virtually impossible for healthy growth short of a break with the international economic order. While Argentina has successfully restructured a $95 billion debt with an unprecedented “hair cut” (around 70% reduction in “net value of debt”), a sustainable growth appears out of reach as long as reliance on the government debt market prevails. In this cycle, the transmission belt of financial crisis to developing countries is characterized by the entry of highly speculative players such as hedge funds, conflicts of interests embedded in “sovereign debt restructuring” (SDR) and vulnerabilities associated with “emerging market debt”.

Developing countries are trying to develop long-term financial markets and institutional investors are expected to play a key role. This paper uses unique evidence on the universe of institutional investors from the leading case of Chile to study to what extent mutual funds, pension funds, and insurance companies hold and bid for long-term instruments, and which factors affect their choices. The paper uses monthly asset-level portfolios to show that, despite the expectations, mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing yields higher returns. Thus, the expansion of large institutional investors does not necessarily imply longer-term markets.