Debt Distress in the EMs

This chapter covers a broad set of topics helpful for building a conceptual foundation for a better understanding of the EM cohort and the underlying reasons for the perceived differences in restructuring outcomes in the emerging markets (EM) versus those in advanced economies (AE). The discussion compares EMs to AEs, covering generalized EM characteristics (economic, human, and institutional development) and their impact on financial risk generally, outlining drivers of NPLs and LGD. Institutions (informal and formal) are defined and their role in a country’s economy and growth is explored, focusing on financial instability and its drivers and the way institutions (or their absence) play a mitigating (or aggravating) role in financial instability. This point is illustrated by comparing two fictitious countries, the Staunch Republic and the Footloose Federation, and how they responded in times of crisis. Financial crises are considered more generally, with their taxonomy (banking, currency, and debt) and some of their main drivers are analyzed. From this base, the chapter moves on to NPLs/LDG and their systemic drivers. To reinforce its central message, the chapter closes with an allegorical tale of the “Two Travellers,” in which Charles and Mei-Ling’s choices and their environments together have an impact on the success of their respective journeys.