Brady Plan
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Brady bonds are
dollar Dollar is the name of more than 25 currencies. The United States dollar, named after the international currency known as the Spanish dollar, was established in 1792 and is the first so named that still survives. Others include the Australian d ...
-denominated bonds, issued mostly by
Latin America Latin America is the cultural region of the Americas where Romance languages are predominantly spoken, primarily Spanish language, Spanish and Portuguese language, Portuguese. Latin America is defined according to cultural identity, not geogr ...
n countries in the late 1980s. The bonds were named after
United States Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
Nicholas F. Brady, who proposed a novel debt-reduction agreement for
developing countries A developing country is a sovereign state with a less-developed Secondary sector of the economy, industrial base and a lower Human Development Index (HDI) relative to developed countries. However, this definition is not universally agreed upon. ...
.


History

Brady bonds were created in March 1989 to convert bank loans, mostly in
Latin America Latin America is the cultural region of the Americas where Romance languages are predominantly spoken, primarily Spanish language, Spanish and Portuguese language, Portuguese. Latin America is defined according to cultural identity, not geogr ...
, 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 occ ...
was small and
illiquid In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...
, 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 In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt ( ...
, the countries issued new bonds for the
principal sum Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Commerc ...
and, in some cases, unpaid
interest In finance and economics, interest is payment from a debtor 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 distinct f ...
. Because they were tradable and came with some
guarantees A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of those at ...
, 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 A commercial bank is a financial institution that accepts Deposit (finance), deposits from the public and gives loans for the purposes of consumption and investment to make a Profit (economics), profit. It can also refer to a bank or a division o ...
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 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 ...
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 holders 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 funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
,
World Bank The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
, 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 and silver held by a central bank or other monetary authority that are primarily available to balance payments of the country, ...
. Interest payments on Brady bonds, in some cases, are guaranteed by securities of at least double-A-rated
credit quality Credit (from Latin verb ''credit'', meaning "one believes") is the Trust (social sciences), trust which allows one Party (law), party to provide money or resources to another party wherein the second party does not reimburse the first party imm ...
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 New York (state), State of New York, the 12 norther ...
. Countries that participated in the initial round of issuing Brady bonds were
Argentina Argentina, officially the Argentine Republic, is a country in the southern half of South America. It covers an area of , making it the List of South American countries by area, second-largest country in South America after Brazil, the fourt ...
,
Brazil Brazil, officially the Federative Republic of Brazil, is the largest country in South America. It is the world's List of countries and dependencies by area, fifth-largest country by area and the List of countries and dependencies by population ...
,
Bulgaria Bulgaria, officially the Republic of Bulgaria, is a country in Southeast Europe. It is situated on the eastern portion of the Balkans directly south of the Danube river and west of the Black Sea. Bulgaria is bordered by Greece and Turkey t ...
,
Costa Rica Costa Rica, officially the Republic of Costa Rica, is a country in Central America. It borders Nicaragua to the north, the Caribbean Sea to the northeast, Panama to the southeast, and the Pacific Ocean to the southwest, as well as Maritime bo ...
,
Dominican Republic The Dominican Republic is a country located on the island of Hispaniola in the Greater Antilles of the Caribbean Sea in the Atlantic Ocean, North Atlantic Ocean. It shares a Maritime boundary, maritime border with Puerto Rico to the east and ...
,
Ecuador Ecuador, officially the Republic of Ecuador, is a country in northwestern South America, bordered by Colombia on the north, Peru on the east and south, and the Pacific Ocean on the west. It also includes the Galápagos Province which contain ...
,
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
,
Morocco Morocco, officially the Kingdom of Morocco, is a country in the Maghreb region of North Africa. It has coastlines on the Mediterranean Sea to the north and the Atlantic Ocean to the west, and has land borders with Algeria to Algeria–Morocc ...
,
Nigeria Nigeria, officially the Federal Republic of Nigeria, is a country in West Africa. It is situated between the Sahel to the north and the Gulf of Guinea in the Atlantic Ocean to the south. It covers an area of . With Demographics of Nigeria, ...
,
Philippines The Philippines, officially the Republic of the Philippines, is an Archipelagic state, archipelagic country in Southeast Asia. Located in the western Pacific Ocean, it consists of List of islands of the Philippines, 7,641 islands, with a tot ...
,
Poland Poland, officially the Republic of Poland, is a country in Central Europe. It extends from the Baltic Sea in the north to the Sudetes and Carpathian Mountains in the south, bordered by Lithuania and Russia to the northeast, Belarus and Ukrai ...
,
Uruguay Uruguay, officially the Oriental Republic of 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 the Río de la Plata to the south and the A ...
, and
Venezuela Venezuela, officially the Bolivarian Republic of Venezuela, is a country on the northern coast of South America, consisting of a continental landmass and many Federal Dependencies of Venezuela, islands and islets in the Caribbean Sea. It com ...
. 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 (; ) was a financial crisis that originated in the early 1980s (and for some countries starting in the 1970s), often known as '' La Década Perdida'' (The Lost Decade), when Latin American countries reached a point ...
, 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 A hairstyle, hairdo, haircut, or coiffure refers to the styling of hair, usually on the human head but sometimes on the face or body. The fashioning of hair can be considered an aspect of personal grooming, fashion, and cosmetics, although ...
." 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. Ho ...
of the claims before the restructurings. Guarantees attached to Brady bonds included collateral 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 (finance), option to exchange a Security (finance), security at a set price. The buyer of the call option has the righ ...
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 country spanning Eastern Europe and North Asia. It is the list of countries and dependencies by area, largest country in the world, and extends across Time in Russia, eleven time zones, sharing Borders ...
and
Ecuador Ecuador, officially the Republic of Ecuador, is a country in northwestern South America, bordered by Colombia on the north, Peru on the east and south, and the Pacific Ocean on the west. It also includes the Galápagos Province which contain ...
. The latter country, in 1999, became the first country to default on its Brady bonds. In 2003,
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
became the first country to retire its Brady debt. The
Philippines The Philippines, officially the Republic of the Philippines, is an Archipelagic state, archipelagic country in Southeast Asia. Located in the western Pacific Ocean, it consists of List of islands of the Philippines, 7,641 islands, with a tot ...
bought back all of its Brady bonds in May 2007, joining
Colombia Colombia, officially the Republic of Colombia, is a country primarily located in South America with Insular region of Colombia, insular regions in North America. The Colombian mainland is bordered by the Caribbean Sea to the north, Venezuel ...
,
Brazil Brazil, officially the Federative Republic of Brazil, is the largest country in South America. It is the world's List of countries and dependencies by area, fifth-largest country by area and the List of countries and dependencies by population ...
,
Venezuela Venezuela, officially the Bolivarian Republic of Venezuela, is a country on the northern coast of South America, consisting of a continental landmass and many Federal Dependencies of Venezuela, islands and islets in the Caribbean Sea. It com ...
, and
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
as countries that have retired the bonds.


See also

*
Debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
* Debt relief *
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 wil ...


References

{{reflist


External links


Treasury press release on Mexico retiring its Brady bonds



BBC 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