ABSTRACT
Following Mexico’s moratorium on its external debt payments in 1982, virtually all voluntary lending to emerging markets by commercial banks ceased (Buchheit 1999); and the 1980s came to be known as the “lost decade” in Latin America. When lending to these markets restarted in the 1990s as a result of the Brady Plan, lenders sought to avoid any repeat of the write-downs imposed on commercial banks by swapping loans for sovereign bonds. Unlike bank lending, however, Brady bonds issued under New York law cannot be restructured without unanimous consent. While this may be a useful check on debtor’s “moral hazard”, it means that emerging markets are exposed to financial crisis due to creditor panic or extraneous shocks to their debt service capacity. Nevertheless, for some years, capital kept flowing to emerging markets at modest rates of interest – underwritten in part by an IMF policy of (ever-increasing) bail-outs. Following Russia’s partial foreign debt repudiation in August 1998, however, generous inflows to Latin America once again came to a standstill; and sovereign interest rate spreads rose to over 1,600 basis points on the EMBI index, remaining above 700 basis points for the next two years.
