the resolution and workouts took several years. More recently, expectations that Russia or Argentina would be bailed out were proven wrong. As individual investors have incurred or will incur substantial losses, the moral hazard problem associated with expected bailouts should diminish. All this means that debt problems are likely to be addressed on a case-by-case basis, with the onus for resolution falling on the countries themselves.

A last critical consideration for MACs is how the market perceives the sustainability of their debt levels, which can be inferred from the EMBI Global spread for a particular country.<sup>36</sup> This spread is an index of default risk relative to advanced benchmark countries, typically the USA, and is usually computed as the arithmetic difference between the yield on the MAC bond and that on a bond of comparable maturity in the benchmark country.<sup>37</sup> In general, a lower EMBI spread can be interpreted as connoting a reduced default probability, although this is not automatically the case. This is because a lower spread can be the result, for example, of the benchmark yield’s going down sharply (the case in recent years) even if the probability of default and default recovery value as assessed by the market do not change. Likewise, a drop in spreads can also occur if the benchmark yield goes down while assumed default recovery value goes up with an unchanged probability of default.<sup>38</sup> In order to deal with this ambiguity, the figures below report spreads for selected countries which experienced a crisis during 1990s together with the corporate high-yield (“junk bond”) spread.

Figure 2 contains the EMBI global spreads for Brazil, Turkey, Chile, and developed country high-yield debt, or junk bonds, for the period 1996-2003. For much of the time, Brazil’s EMBI spread was above the junk bond spread, and significantly so during crisis periods, such as during the Russian crisis and its aftermath, and the confidence crisis that erupted in May 2002 in connection with the Presidential elections. It is therefore encouraging that by the end of the period shown in Figure 2, Brazilian spreads had dropped to the level of the junk bond spread. In contrast, Turkey’s EMBI spread has hovered near the junk bond spread and has been much less volatile than that of Brazil, while Chile’s has been consistently lower and on a declining trend. Figure 3 shows the spreads for selected East Asian countries. While spreads for Korea, Malaysia and Thailand jumped to exceed the junk bond spread during the 1997-98 crisis period, these dropped to substantially lower levels by mid-1999 and have been on a downtrend since. The Philippines is an exception. Its spread is close to the junk bond spread. Overall, therefore, the picture on spreads is mixed. Chile, Korea, Malaysia and Thailand have clearly strengthened creditworthiness, but Brazil, Turkey and the Philippines are vulnerable, although the trends for Brazil and Turkey are more encouraging.

To conclude, the initiatives being taken by indebted countries, the changed nature of the markets and incentives, and the signals embedded in EMBI spreads all suggest that the risks of a generalized debt crisis in MACs have receded since the late 1990s.

> 36 JP Morgan’s EMBI Global is regarded as the most comprehensive MAC debt index.  It was introduced in 1999.  The EMBI spread is a weighted average of the spreads of US dollar bonds issued by a particular MAC.  For details, see JP Morgan (1999).

> 37 It is sometimes analytically more convenient to compute the spread  geometrically. Thus, letting _s_ denote the spread, _Y_ the bond yield in the MAC and _y_ that in the benchmark country, the spread is defined implicitly by: (1+ _s_ )(1+ _y_ )=1+ _Y_ .  However, the convention is to report the spread simply as _Y_ - _y_ .

> 38 It is easy to construct numerical examples under risk neutrality to show this.  All we observe is the price of the bond and its spread; the probability of default and implied recovery value must be extracted.  A complete discussion is contained in Merrick (2004).

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