Brady bonds are
dollar
Dollar is the name of more than 20 currencies. They include the Australian dollar, Brunei dollar, Canadian dollar, Hong Kong dollar, Jamaican dollar, Liberian dollar, Namibian dollar, New Taiwan dollar, New Zealand dollar, Singapore dollar, ...
-denominated
bonds, issued mostly by
Latin America
Latin America or
* french: Amérique Latine, link=no
* ht, Amerik Latin, link=no
* pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived ...
n countries in the late 1980s. The bonds were named after
U.S. Treasury Secretary
Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.
History
Brady bonds were created in March 1989 to convert bank loans, mostly in
Latin America
Latin America or
* french: Amérique Latine, link=no
* ht, Amerik Latin, link=no
* pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived ...
, into a variety or "menu" of new
bonds after many countries
defaulted on their debt in the 1980s. At the time, the market for emerging markets'
sovereign debt
A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
was small and
illiquid, and the standardization of
emerging-market debt facilitated risk-spreading and trading. In exchange for commercial
bank
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
loans, the countries issued new bonds for the
principal sum
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
and, in some cases, unpaid
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
. Because they were tradable and came with some
guarantees, they were sometimes more valuable to the creditors than the original bonds.
The key innovation behind the introduction of Brady Bonds was to allow the
commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
s. This reduced the
concentration risk
Concentration risk is a banking term describing the level of risk in a bank's portfolio arising from concentration to a single counterparty, sector or country.
The risk arises from the observation that more concentrated portfolios are less div ...
to those banks.
In the second round, creditors converted their existing claims into their choice among the "menu" of options agreed upon in the first round. The penalties for creditors failing to comply with the terms of the deal were never made explicit. Nevertheless, compliance was not an important problem under the Brady Plan. Banks wishing to cease their foreign lending activities tended to choose the exit option under the auspices of the deal.
By offering a "menu" of options, the Brady Plan permitted credit restructurings to be tailored to the heterogeneous preferences of creditors. The terms achieved under the deals indicate that debtors used the menu approach to reduce the cost of debt reduction. Furthermore, it reduced the
holdout problem
In finance, a holdout problem occurs when a bond issuer is in default or nears default, and launches an exchange offer in an attempt to restructure debt held by existing bond holders. Such exchange offers typically require the consent of hol ...
in which certain shareholders have an incentive not to participate in the restructuring in the hope of getting a better deal.
The principal amount was usually collateralized by specially issued
US Treasury 30-year zero-coupon bonds purchased by the debtor country using a combination of
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
,
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, and the country's own
foreign currency reserves
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...
. Interest payments on Brady bonds, in some cases, are guaranteed by securities of at least double-A-rated
credit quality
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
held with the
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of Ne ...
.
Countries that participated in the initial round of issuing Brady bonds were
Argentina
Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the List of South American countries by area, second-largest ...
,
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
,
Bulgaria
Bulgaria (; bg, България, Bǎlgariya), officially the Republic of Bulgaria,, ) is a country in Southeast Europe. It is situated on the eastern flank of the Balkans, and is bordered by Romania to the north, Serbia and North Macedo ...
,
Costa Rica
Costa Rica (, ; ; literally "Rich Coast"), officially the Republic of Costa Rica ( es, República de Costa Rica), is a country in the Central American region of North America, bordered by Nicaragua to the north, the Caribbean Sea to the no ...
,
Dominican Republic
The Dominican Republic ( ; es, República Dominicana, ) is a country located on the island of Hispaniola in the Greater Antilles archipelago of the Caribbean region. It occupies the eastern five-eighths of the island, which it shares with ...
,
Ecuador
Ecuador ( ; ; Quechua: ''Ikwayur''; Shuar: ''Ecuador'' or ''Ekuatur''), officially the Republic of Ecuador ( es, República del Ecuador, which literally translates as "Republic of the Equator"; Quechua: ''Ikwadur Ripuwlika''; Shuar: ' ...
,
Mexico
Mexico (Spanish language, Spanish: México), officially the United Mexican States, is a List of sovereign states, country in the southern portion of North America. It is borders of Mexico, bordered to the north by the United States; to the so ...
,
Morocco
Morocco (),, ) officially the Kingdom of Morocco, is the westernmost country in the Maghreb region of North Africa. It overlooks the Mediterranean Sea to the north and the Atlantic Ocean to the west, and has land borders with Algeria to A ...
,
Nigeria
Nigeria ( ), , ig, Naìjíríyà, yo, Nàìjíríà, pcm, Naijá , ff, Naajeeriya, kcg, Naijeriya officially the Federal Republic of Nigeria, is a country in West Africa. It is situated between the Sahel to the north and the Gulf o ...
,
Philippines
The Philippines (; fil, Pilipinas, links=no), officially the Republic of the Philippines ( fil, Republika ng Pilipinas, links=no),
* bik, Republika kan Filipinas
* ceb, Republika sa Pilipinas
* cbk, República de Filipinas
* hil, Republ ...
,
Poland
Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populou ...
,
Uruguay
Uruguay (; ), officially the Oriental Republic of Uruguay ( es, República Oriental del Uruguay), is a country in South America. It shares borders with Argentina to its west and southwest and Brazil to its north and northeast; while bordering ...
, and
Venezuela
Venezuela (; ), officially the Bolivarian Republic of Venezuela ( es, link=no, República Bolivariana de Venezuela), is a country on the northern coast of South America, consisting of a continental landmass and many islands and islets in th ...
.
Participating countries were to liberalize their economies in order to qualify for Brady Bonds.
The Brady Bonds were credited for resolving the
Latin American debt crisis
The Latin American debt crisis ( es, Crisis de la deuda latinoamericana; pt, Crise da dívida latino-americana) was a financial crisis that originated in the early 1980s (and for some countries starting in the 1970s), often known as ''La Déca ...
, but did not prevent future looming debt crises.
Types
There were two main types of Brady bonds:
*''Par bonds'' were issued to the same value as the original loan, but the coupon on the bonds is below market rate; principal and interest payments are usually guaranteed.
*''Discount bonds'' were issued at a discount to the original value of the loan, but the coupon is at market rate; principal and interest payments are usually guaranteed.
Other, less common, types include ''front-loaded interest-reduction bonds'' (FLIRB), ''new-money bonds'', ''debt-conversion bonds'' (DCB), and ''past-due interest bonds'' (PDI). Brady Bond negotiations generally involved some form of "
haircut." In other words, the value of the bonds resulting from the restructurings was less than the
face value
The face value, sometimes called nominal value, is the value of a coin, bond, stamp or paper money as printed on the coin, stamp or bill itself by the issuing authority.
The face value of coins, stamps, or bill is usually its legal value. Howe ...
of the claims before the restructurings.
Guarantees attached to Brady bonds included
collateral
Collateral may refer to:
Business and finance
* Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan
* Marketing collateral, in marketing and sales
Arts, entertainment, and media
* ''Collate ...
to guarantee the principal, rolling interest guarantees, and
value recovery rights. Not all Brady bonds would necessarily have all those forms of guarantee, and the specifics would vary from issuance to issuance.
Current status
Although the Brady bond process ended during the 1990s, many of the innovations introduced in these restructurings (
call option
In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy ...
s embedded in the bonds, "stepped" coupons, pars and discounts) were retained in the later sovereign restructurings in, for example,
Russia
Russia (, , ), or the Russian Federation, is a transcontinental country spanning Eastern Europe and Northern Asia. It is the largest country in the world, with its internationally recognised territory covering , and encompassing one-ei ...
and
Ecuador
Ecuador ( ; ; Quechua: ''Ikwayur''; Shuar: ''Ecuador'' or ''Ekuatur''), officially the Republic of Ecuador ( es, República del Ecuador, which literally translates as "Republic of the Equator"; Quechua: ''Ikwadur Ripuwlika''; Shuar: ' ...
. The latter country, in 1999, became the first country to default on its Brady bonds. In 2003,
Mexico
Mexico (Spanish language, Spanish: México), officially the United Mexican States, is a List of sovereign states, country in the southern portion of North America. It is borders of Mexico, bordered to the north by the United States; to the so ...
became the first country to retire its Brady debt. The
Philippines
The Philippines (; fil, Pilipinas, links=no), officially the Republic of the Philippines ( fil, Republika ng Pilipinas, links=no),
* bik, Republika kan Filipinas
* ceb, Republika sa Pilipinas
* cbk, República de Filipinas
* hil, Republ ...
bought back all of its Brady bonds in May 2007, joining
Colombia
Colombia (, ; ), officially the Republic of Colombia, is a country in South America with insular regions in North America—near Nicaragua's Caribbean coast—as well as in the Pacific Ocean. The Colombian mainland is bordered by the ...
,
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
,
Venezuela
Venezuela (; ), officially the Bolivarian Republic of Venezuela ( es, link=no, República Bolivariana de Venezuela), is a country on the northern coast of South America, consisting of a continental landmass and many islands and islets in th ...
, and
Mexico
Mexico (Spanish language, Spanish: México), officially the United Mexican States, is a List of sovereign states, country in the southern portion of North America. It is borders of Mexico, bordered to the north by the United States; to the so ...
as countries that have retired the bonds.
See also
*
Debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
*
Debt relief Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.
From antiquity through the 19th century, it refers to domestic debts, in particu ...
*
Sovereign default
A sovereign default is the failure or refusal of the
government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
References
{{reflist
External links
Treasury press release on Mexico retiring its Brady bondsBBC story on Ecuadorean default
1989 in international relations
Bonds in foreign currencies
Economic history of the United States
Government bonds
History of the foreign relations of the United States