The Full Brady

Brady Bonds For the Eurozone

Brady s plan looked like a great success.

Inevitably, the Brady Plan looks like a good model for southern Europe.

The initiative for the Brady Plan did not come from the official sector at all.

Two of my Northern California neighbors, Peter Allen and Gary Evans both veterans of the Brady Plan have explained how a similar plan could be implemented today.

Sovereign debt was eventually restructured through the creation of Brady bonds.

Under the Brady Plan, a country s payments were indexed to its export prices or terms of trade.

Some sort of Brady bond to reduce and extend excessive sovereign debt will be necessary.

On 17 March 2010, the Deputy First Minister for Northern Ireland, Martin McGuinness, called for Brady to resign.

Calling for a European Brady plan today does not guarantee the necessary conditions for such a plan to succeed.

When Latin American debt was restructured in the 1980 s under the Brady Plan, these sweeteners were provided by the United States Treasury.

Finally, under the 1987 Brady plan, debts were written down by roughly 30 , four years after the crisis hit full throttle.

The twist to this story is that the head of the Paris Club at the time of the Brady Plan was none other than Jean Claude Trichet, the current president of the ECB.

Gradualism and profitability, and eventually US Brady bonds, worked in the Latin American debt crisis in the 1980 s. But a difficult economy will drive down the value of toxic assets and make more assets toxic.

In the United States successful Brady Bond plan in 1989, the debtors Mexico, Argentina, and Brazil agreed to pay what they could.

Brady s plan looked like a great success. Confidence returned, capital flight from Latin America was reversed, and capital markets became willing to provide financing again.

Before the Brady Plan was announced, Mexico had accepted a wide ranging Pact of Economic Solidarity and Growth, which immediately improve investor confidence and reduced sky high domestic interest rates.

Inevitably, the Brady Plan looks like a good model for southern Europe. Why not avoid seven years of misery, and begin some similar rescue operation now that could lead to a return to economic vigor and dynamism?

The initiative for the Brady Plan did not come from the official sector at all. It was the willingness of some large financial institutions to trade in discounted debt that established a market that could clear out the legacy of past mistakes.

So, rather than worrying that they might be approaching a Lehman Brothers moment, European policymakers would be better off designing a Greek debt deal tailored, like the Brady Plan, to avoid this fate.

Without the preconditions that made the Brady Plan work, simply transplanting a debt write off would only augment uncertainty and fuel the political revulsion that already threatens to undermine European integration.

More than three years passed before new US Treasury Secretary Nicholas Brady set out a more satisfactory program, in which banks would be given a menu of options that included lower interest rates on the debt and a hefty discount on the principal.

Latin America s rebirth and modern growth dynamic really only began to unfold after the 1987 Brady plan orchestrated massive debt write downs across the region.

What better legacy for an outgoing ECB president than to dust off his notes and explain to other European policymakers how the lessons of the Brady Plan might now be applied?

Fortunately, there is another way emulate the Brady Plan, under which commercial banks, together with the United States, the International Monetary Fund, and the Paris Club of sovereign creditors, restructured and took haircuts on the debt of Latin American and Eastern European governments at the end of the 1980 s.

Despite significantly lower debt GDP ratios and continuous debt restructuring, they eventually needed the large debt reduction that came with the issuance of Brady bonds to achieve some breathing room.

On this topic, there is no shortage of expert plans among them bond buy backs, bond swaps, and the creation of Eurobonds, a European version of the Brady bonds issued by Latin American countries that defaulted in the 1980 s.

The twist to this story is that the head of the Paris Club at the time of the Brady Plan was none other than Jean Claude Trichet, the current president of the ECB. The Paris Club under Trichet provided Poland with a 50 reduction of its debt, on the condition that the country s bank creditors take a similar haircut.