Past cycles of sovereign lending and default in emerging markets
suggest that debt crises will recur at some point. In addressing
debt crises it has proven helpful to distinguish between situations
of illiquidity and insolvency. Solutions range from a voluntary
debt swap to a soft or hard restructuring. This book shows why
investors should reckon with similar credit events in the
future.
Insights gained from recent restructurings inspire the design of
a valuation model for sovereign bonds. Using the distinction
between hard and soft restructurings, the model draws parallels to
the concepts of face value and market value recovery. An extension
into credit default swap markets explains why bond and CDS spreads
diverge during distress.
This survey of the sovereign bond market provides investors with
a useful toolkit for analyzing sovereign bonds and foreseeing
trends in the international financial architecture. The result
should be a better understanding of debt crises and more deliberate
investment decisions.
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