Allen Frankel* The strong performance of emerging market credits (EMCs) in recent months has signaled the arrival of another ﬁnancial spring. EMCs and other high-yield investments have performed well in an environment marked by short-term interest rates near the zero bound for several currencies. Daniel Marx has outlined a case in which an Argentine debt exchange could create value for investors. He knowingly attributes this possibility to good responses to appropriate incentives rather than any ﬁnancial alchemy. In my short comments, I seek brieﬂy to shed some light on a few of the lessons learned in recent years concerning ﬁnancing choices made in periods when countries regain access to foreign capital. Argentina has just experienced an extraordinary period of crisis, during which most Argentine domestic cross-border ﬁnancing transactions were severely aﬀected. This included cross-border creditors with collateralized dollar-denominated loans to private ﬁrms. Some loans were backed by (collateralized by) domestic Argentine assets, such as home mortgages. Such collateralized credit arrangements were covered by the government’s required redenomination (pesoiﬁcation) of credit contracts. In these cases, losses could be attributed to the actions of the sovereign, since they occurred even in cases when the borrower was willing and able to service its debt. Other private contracts emerged unscathed. One example of this type of contract is a so-called future ﬂow transaction. The above discussion sets out a particularly cumbersome mechanism for countries to deal with post-crisis ﬁnancing diﬃculties. Alternative mechanisms have been proposed that would deploy structured ﬁnance...
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