Brady Plan – What is it, definition and concept | 2022

The Brady Plan, launched in 1989, consisted of a series of measures aimed at restructuring the debt of various emerging economies. Its name is due to the fact that it was carried out by the US Secretary of the Treasury, Nicholas Brady.

With the highly indebted countries of Latin America, the Brady Plan offered solutions such as the cancellation of a large part of the debt, the repurchase of the debt and the issuance of bonds. This plan was implemented in a total of 14 countries.

Therefore, the Brady Plan, backed by the IMF, the World Bank and the United States, sought to open a way to cancel the sovereign debt. For this, the affected countries could exchange the debt through the so-called Brady bonds.

What circumstances led to the Brady Plan?

In the 1980s, Latin American countries were highly indebted. Precisely, excessive external indebtedness endangered foreign investment. In this sense, countries like Mexico, Brazil, and Argentina had serious problems in dealing with foreign debt.

The people you know are on campus

For you to learn much more about finances, investment and the stock market, we have created the Campus of Economipedia. A video course platform, designed for you to learn in an entertaining way with practical and entertaining content.

The first 1,000 subscribers have a 50% discount for life, take advantage of it!

The Baker Plan, with a new schedule for debt payment, had failed to respond to the worrying debt situation that Latin America was going through. And it is that Mexico went into suspension of payments.

See also  Series A – Financing | Economipedia

In such a situation, it was urgent to boost the economic recovery of a number of Latin American countries by reducing debt. To do this, different proposals were proposed to the traditional alternatives.

Thus, the cancellation of the debt was proposed, the issuance of bonds was proposed, as well as a commitment to reduce the total amount of the debt, taking its value in the secondary markets as a reference.

What did it consist of?

The Brady Plan set goals such as the reduction of foreign debt, the promotion of savings and investment.

Although debt reduction was facilitated, in return it was required to implement important economic measures. All this meant accepting the proposals established in the Washington Consensus. Therefore, the countries involved had to carry out a series of political reforms aimed at reducing the intervention of the public sector, as well as addressing crucial privatizations.

Likewise, the commitment of the Latin American countries was to promote growth through tax cuts for companies and the introduction of national products in international markets.

One of the most notable measures was the issuance of the so-called Brady bonds. It was a financing instrument issued by emerging States that facilitated the possibility of restructuring the debt. Thus, countries could have loans that they could comfortably repay thanks to more affordable terms.

It should be noted that the Brady bonds had the backing of international institutions such as the World Bank and the International Monetary Fund.

It is true that there were different types of Brady bonds (up to eight). However, two classes of bonds are worth noting.

  • Par bonds: Although the bonds were exchanged for their face value, the interest to be paid was lower than the market rate and long payment terms were offered.
  • Discount vouchers: They allowed the debt to be exchanged for an amount lower than its face value.
See also  Traditional advertising - What is it, definition and concept | 2022

Debt repurchase was also implemented. Thanks to this measure, the most indebted States could exchange their debt with the creditor for a value lower than the market value.

On the other hand, a debt relief was accepted. To do this, the countries benefiting from the forgiveness had to agree to pay variable interest referenced to LIBOR.

What did the Brady Plan entail?

As we previously pointed out, the Brady Plan was implemented in up to 14 countries. Although the plan began to be applied in 1989, Peru would be the last country to join in 1997.

Thanks to the Brady Plan, between 1989 and 1995, it was possible to negotiate up to 190,000 million dollars in external debt, reducing the total external debt by 60,000 million dollars.

With the exception of what happened with the bankruptcy of Argentina, the countries adhering to the Brady Plan were able to repay the amount of the bond issues. Furthermore, several countries managed to repay their debt early, so that, in 2007, practically all of the Brady bonds were no longer on the market.

Leave a Comment