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Crossover nerves fuel contagion of doubt

Contagion from US domestic corporate bond markets infected Latin American debt in the last months of the year, reversing earlier strong performance by Latin bonds that rallied on the improving credit fundamentals of Mexico and Brazil. It’s one of the downsides for Latin borrowers of having their foreign debt now predominantly owned by so-called crossover investors, not Latin specialists. These nervous buyers bring added volatility to a market where periodic panics, such as that recently surrounding Argentina, are a regular feature. They won’t even consider financing the region’s corporate borrowers, which must now hope domestic markets develop quickly. Danielle Robinson reports

Mohamed El-Erian

A year doesn't go by, it seems, without an emerging-markets crisis. In the fourth quarter Argentina, the biggest international market borrower from Latin America, sought out an IMF-led emergency funding package of about $20 billion as it became increasingly clear it would not be able to scrape together enough money to meet its $21.8 billion funding requirements in 2001.

Argentina's problems are particularly unwelcome at this juncture in the emerging market's development. High-grade corporate bond buyers and other crossover investors have suddenly found themselves the rulers of the asset class. Years of crises have taken their toll on hedge funds and leveraged players including banks' proprietary trading desks, which have almost disappeared from the emerging markets. Dedicated funds have also steadily shrunk in size, accounting for only a few billion dollars worth of assets under management. By default, a naturally risk-averse, crossover, high-grade bond investor base now determines the direction of prices in one of the riskiest asset classes.

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