Investors Take More Downside Risk in Emerging-Market Debt Deals

For decades, globe-trotting financiers have offered a deal to some developing nations drowning in debt. Bond investors take losses up front, accepting a reduction in their principal and lower interest rates. In exchange they get what’s called a sweetener, giving them extra payments if the country’s economy improves—in some cases, amounting to a multibillion-dollar jackpot.

But there’s a problem: Governments in poor countries have tended to lose out, because debt payments often rise much more than they expected, leaving taxpayers saddled with even heavier bills.