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The Peso Problem, Mexico and Junk Bonds

Back in the 1970s, the country had hitched its peso to the dollar, but Mexican banks offered much higher interest rates than US banks. It seemed a no-brainer to simply borrow money in America and deposit it south of the border and bank the proceeds. Yet few did.

It soon became apparent why. In August 1976 the peg snapped and the Mexican currency promptly lost more than half its value against the greenback.

But the data Mr Milken used was based on relatively solid junk bonds in an era of faster inflation that made defaults rarer, not the low-quality trash that became the norm in the 1980s

Robin Wigglesworth FT 16 December 2019

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