- High levels of debt: Emerging markets often have high levels of debt, both public and private. This can make it difficult for them to meet their debt obligations, especially when faced with economic shocks.
- Weak institutions: The institutions in emerging markets are often weaker than those in developed countries. This can make it more difficult for emerging markets to enforce contracts and protect the rights of creditors.
- Political instability: Emerging markets are also more likely to experience political instability than developed countries. This can make it difficult for creditors to predict the future policy environment in an emerging market.
- Currency risk: Creditors who lend to emerging markets face currency risk, which is the risk that the value of the local currency will fall. This can reduce the value of the interest and principal payments that the creditor receives in its own currency.
- Exchange controls: Some emerging market governments impose exchange controls, which restricts the ability of residents to convert their domestic currency into foreign currency. This can make it difficult for creditors to repay their loans in a foreign currency.
