Brady Plan

In August, 1982, the Less Developed Countries (LDC) debt situation became a crisis when Mexico suspended current payments to its creditors. The crisis simmered for the next seven years as slow growth, inflation and capital flight plagued debtor nations. Private lenders were reluctant to provide new money, but at the same time lending by official, taxpayer-supported institutions increased.

In March 1989, the United States Treasury Department under then Treasury Secretary Nicholas F. Brady, formulated a new strategy for dealing with developing country debt. The strategy, known as the "Brady Plan" and drawing on Secretary Brady's career on Wall Street, recognized that reversing the exodus of capital from debtor nations was critical, and that global capital markets would direct resources to any country that had the will to implement genuine reforms based upon sound economic fundamentals and articulated in a manner clearly understood by investors.

Accordingly, the Brady Plan focused on debt and debt service reduction by commercial bank creditors for those debtors who agreed to implement substantial economic reform programs. The Plan offered banks credit enhancements in exchange for their agreement to reduce claims. These credit enhancements were created by first converting commercial bank loans into bonds, and then collateralizing principal and rolling interest payments on those bonds with US Treasury zeroes purchased with the proceeds of IMF and World Bank loans.

By coupling economic reform with debt reduction, the Brady Plan represented a market-oriented solution that served as a catalyst for growth in the emerging markets. To date, Brady restructurings have been implemented in approximately 16 countries, resulting in a $150+ billion market in Brady Bonds.