Emerging Market Bond Meltdowns: Unseen Risks Burning Investors


Investors who jumped into the emerging markets of Bolivia and Ecuador at the start of 2021 expecting to gain a windfall were in for a nasty surprise. Benchmark notes from the two countries have plummeted in value, making them the worst-performing developing nations this year. This sudden drop in bond values was felt particularly by Wall Street banks like Bank of America Corp.and Morgan Stanley, which had made very wrong calls on Ecuador and lost plenty in their investments.

The meltdown of Bolivian and Ecuadorian bonds highlights the risks that come with investing in emerging markets, where investor sentiment can shift quickly. Cracks in Ecuador’s President Guillermo Lasso’s governance started to become visible in mid-2022 when huge protests by indigenous groups broke out. Lasso’s opponents began to campaign to remove him, which caused the bonds to plummet 10 cents to 60 cents on the dollar. Investors had hoped that Lasso would put forward policies that would have been friendly to the markets, but the voters rejected them in February.

Meanwhile, Bolivia has been struggling to retain its international reserves, which have been slowly declining due to high budget deficits and weak natural gas revenue. This has weakened the country’s currency and when citizens started to line up in front of the central bank in La Paz to withdraw US dollars, its bonds due in 2028 dropped to 53 cents on the dollar by the end of March.

As an important takeaway, this event should serve as a cautionary tale for investors and a reminder of how quickly risky bets in emerging markets can implode. Other countries in the Andean region like Peru, Chile and Colombia fared much better and posted a return of 3 % compared to the 1.9% across emerging markets.

Bank of America Corporation (BAC) is an American multinational financial and banking services company, headquartered in Charlotte, North Carolina. It is one of the world’s leading banks, serving 37 million customers in over 160 countries. With a global presence, it provides services for individuals, institutions, governments and businesses and provides strategies across investment banking, retail banking, asset management and commercial banking.

Guillermo Lasso is an Ecuadorian business executive, banker and the country’s current president. He is a centrist politician and was one of the few Latin American leaders who was seen as market-friendly. Lasso was elected in 2021 and was hoping to pass several referendums that would have allowed for extradition of organized crime leaders. Unfortunately, the referendum was defeated due to his poor political standing and his opponents have since mounted a campaign to oust him for graft charges.