The IMF 30 Years After Brady

Rhoda Weeks-Brown and Martin Mühleisen on the 30 years of Brady plan which restructured Latin American Banks:

Last month marked the 30th anniversary of the announcement of the “Brady plan”. In response to the 1980s Latin American debt crisis, this plan, named after then US Treasury Secretary Nicholas Brady, allowed countries to exchange their commercial bank loans for bonds backed by US Treasuries, bringing an end to a tumultuous period with possible systemic consequences for the global banking system at the time. In what was then a novel approach, banks agreed to provide much needed debt relief—the average write down was 35 percent—in exchange for risk-free tradable instruments.

The IMF played a crucial role, consistent with its mandate to help member countries resolve their balance of payments problems and regain external viability.

It not only oversaw countries’ adjustment plans and provided financing to buy back debt and secure payments on the swapped bonds—it also provided a forum for creditor-debtor negotiations and incentivized better creditor coordination through a change in its own policies. Before the Brady plan, any private creditor could hold up IMF financing by refusing to restructure its claim. That changed with the IMF’s adoption in 1989 of its “lending-into-arrears” policy, under which it could lend to a country that was in arrears on financing from private creditors, so long as the debtor was negotiating with its creditors in good faith.

The Brady deals forever changed the landscape of sovereign finance in two fundamental ways. First, sovereign bonds, held directly or indirectly by a diverse set of possibly thousands of creditors, became the preferred financing instrument for countries, replacing much of sovereign bank loans. Second, the official sector assumed a central role in sovereign debt restructuring.

 

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