Last night’s S&P downgrade of El Salvador’s credit rating to Selective Default makes this report on Emerging Markets (EM) external debt extremely timely. The report quantifies defaults in EM external debt since 1998 and concludes that the asset class is far less risky than commonly perceived. As such, S&P’s downgrade of El Salvador is highly symbolic. Just as El Salvador will continue to service its debt so EM external debt continues to offer good value, even after controlling for defaults. Investors in EM external debt have been paid a risk-free spread of nearly 350bps per year since 1998. Over this period, the benchmark JP Morgan EMBI Global Diversified has paid a yield of 7.33% net of defaults compared to 3.85% for similar duration US 10-year bonds. Default-related losses, which have averaged just 39bps per year since 1998, have declined to just 20bps per year since the Argentinian default of 2002. Total return has been even greater, because the asset class has also delivered strong capital gains. Altogether, this has enabled EM external debt to handsomely outperform the S&P 500 index since the inception of the asset class – with lower volatility.