Brady Plan
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The Brady Plan allowed creditors of Latin American countries to convert their existing debt claims into a variety or "menu" of new claims during the debt crisis of the 1980s. It was first articulated by Secretary of the Treasury Nicholas F. Brady in March 1989.
The plan involved two rounds. In the first round, creditors bargained with debtors over the terms of these new claims. Loosely interpreted, the options contained different mixes of "exit" and "new money" options. The exit options were designed for creditors who wanted to reduce their exposure to a debtor country. These options allowed creditors to reduce their exposure to debtor nations, albeit at a discount. The new money options reflected the belief that those creditors who chose not to exit would experience a capital gain from the transaction, since the nominal outstanding debt obligation of the debtor would be reduced, and with it the probability of future default. These options allowed creditors to retain their exposure, but required additional credit extension designed to "tax" the expected capital gains. The principal of many instruments was collateralized, as were "rolling interest guarantees," which guaranteed payment for fixed short periods. The first round negotiations thus involved the determination of the effective magnitude of discount on the exit options together with the amount of new lending called for under the new money options.
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 these deals indicate that debtors used the menu approach to reduce the cost of debt reduction.
See also: Baker Plan, Holdout problem
External links
- Collective Action Difficulties in Foreign Lending: Banks and Bonds (FRBSF) (http://www.frbsf.org/econrsrch/wklyltr/el96-24.html)