Brady Plan

The Brady Plan was a strategy adopted between 1989 and the early 1990s to restructure the debt contracted by developing countries with commercial banks, in the context of what became known as the crisis of the Latin American debt. It was implemented in several Latin American countries such as Argentina, Brazil, Ecuador, Mexico and Venezuela that were heavily indebted to the US treasury. The plan was named after the then US Secretary of the Treasury, Nicholas Brady.

It was based on debt reduction and debt service operations carried out voluntarily under market conditions. Debt reduction schemes were based on the fact that there was an excess of debt in the economies of developing countries that reduced the possibility of investment, so the reduction in the balance owed (extension of terms together with periods of grace) should generate a certain level of productive investment that would later translate into an increase in the ability to pay.

Scheme

The most important point of this plan was to somehow combine the discounted buybacks with the issuance by the country of the so-called “Brady bonds” in exchange for the credit titles held by the banks. These operations would complement the measures applied by the countries to restore the viability of the balance of payments within the framework of the medium-term structural adjustment programs supported by the International Monetary Fund and other multilateral creditors and by official bilateral creditors. The scheme would consist of repurchasing debt under the following modalities:

1. Bonus issue on par.
2. Emission of bonds under pair (or discount)
3. Cash Payment (applying a discount factor)

This scheme provided aid to the countries that were part of the plan designed by Nicholas Brady, United States Secretary of the Treasury. More specifically, the doors to international financial markets were opened again (after reaching an agreement), and from this moment there would no longer be a concentration of creditors in private foreign banks, but creditors would become atomized in the different international capital markets. In order to reach an agreement with creditors and accede to the Brady Plan, debtor countries were required to demonstrate a certain degree of commitment, conditioned on applying the guidelines of the Washington Consensus. In the case of the Mexican nation, President Salinas de Gortari accepted the plan to restructure the debts of the Mexican country. Said plan was adopted by Peru.

The "reduction" in the principal amount of the debt was only feasible if the authorities agreed to continue paying variable interest in the future, set by the creditors. This is, on the other hand, the most openly leonine aspect of the entire debt operation to which the so-called peripheral countries were tied and which consists of contracting a loan without knowing its cost because it is determined, every six months, by the lender through what is called LIBOR (which, in English, means "interbank rate offered in the London market", although the banks accepted the reduction of the original amount of their 'credits' but the country continued paying an unpredictable interest, established by the creditors.In addition, this haircut was not applied to the total renegotiated debt.Thus, the Brady plan included from the beginning, an option that consisted of the possibility of the banks to refuse to carry out any haircut on the indebtedness and set the interest rate instead (which would not be tied to the fluctuations of the aforementioned LIBOR).