Looking forward, we expect emerging markets’ activity to gain dynamism. This trend will contrast with the previous five years’ average and will be buoyed by a weakening US Dollar cycle. This overarching view is tempered by concentrated pockets of severe debt distress within non-systemic EM countries.

In this report we ask three closely related questions with clear investment implications for distressed sovereign credit:

1) What macroeconomic and financial indicators are the most useful to identify sovereigns at risk of default?

2) What are the factors that determine the size of the haircuts in a sovereign restructuring?

3) How do defaults and debt restructurings impact debt characteristics?

Finally, we apply the framework to evaluate investments in Argentine, Ecuadorian, and Lebanese sovereign debt.

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