Bradys ways

The plan launched by Treasury Secretary Nicholas Brady, in March 1989, opened the way to a resolution of the crisis, based on two principles: a market-to-market operation, which came with varying levels of debt write-offs; and a one-off exchange of bank loans against bonds, dubbed Brady bonds, which were immediately traded on large, international markets. Mexico was the first country to benefit from this plan, in early 1990; 16 other countries followed until 1997, including Brazil, Argentina, Venezuela and Poland. This chapter first gives an account of how the whole strategy unfolded over time, and how it came indeed with a rapid, often spectacular recovery of capital inflows into Latin America, with the price of Brady bonds shooting up. Still, the statistics do not fully confirm the ‘debt overhang’ theory, on an ex post basis: debt levels were not significantly reduced, economic growth did not pick up very strongly and, most problematically, investment remained most often subdued. It is argued that on top of the possible yet limited effect of lifting an overhang, a market-based, liquidity-driven dimension should be taken into account.