A new Brady debt plan has already failed

“I’ve got a house that’s a show place/still I cant get no place with you”

Readers may know the novels of Louis Begley Jr or the stories of John Cheever which portray lost worlds, times now as remote as those of Musil, when well-dressed men managed the world’s business in a numinous fog of alcohol while trading money in smaller denominations than what club memberships cost today 1, when borrowers knew their place at the back of the line, and when prejudices 2, hidden but not gone, could be declared openly. People still made long-distance calls, the lumpenproletariat had only recently begun to travel by air, and the risk of humiliation by SMS did not yet disturb the intimacies of the men who ran the few regions of the planet that mattered.

I tell you this by way of an introduction to the work of Neil Shenai and Marjin A. Bolhuis, “How the Brady Plan delivered on debt relief: Lessons and Implications” (Cambridge Elements in International Economics, 2026), which tries to draw modern lessons from the times of Nick Brady and Jim Baker. That era is so distant today that even middle-aged people may not remember US Treasury Secretary Nicholas Brady (1988-1993) and will only dimly recall Bush family fixer James A Baker III (USTS, 1985-1988) and even then mainly for his role in the theft of the 2000 Presidential election. The “Baker Plan” (1985-88) of “multi-year restructuring arrangements” was drawn narrowly as a guide to the temporary embarassment of certain lenders, provided no substantial debt relief, and was soon forgotten. The “Brady Plan”, the chief subject of Shenai and Bolhuis (SB), was a more realistic and effective mechanism than that of Baker. SB find, as have other writers3 , that Brady, in targeting the real problem—insolvency—was more successful in that it did, in a few places, restore growth, lower debt ratios, and—the true goal of all restructurings since the first oil shock of the 1970s—allow borrowers to “return to the market”, meaning that the game of overborrowing could begin again for those who had been temporarily sent off the pitch.

“How the Brady plan delivered”

SB describe what might be called the first modern form of restructuring. 4 The Baker plan, launched in 1985 as a belated response to the Mexican crisis of 1982 and to the frightening rise of the dollar during Reagan’s first term, had modest ambitions. It sought no reduction in the face values of debt stocks—i.e., it imposed no “haircut” on lenders. Its goal was to give short-term liquidity relief to the borrowers, while indirectly refinancing their obligations with loans (the “new money” component) from the IMF and the World Bank so as to provide some confidence to the new lenders. The Baker plan did not, to repeat, involve haircuts because it had been designed by the lenders in the confident expectation that the storm was temporary. The Reinhart and Trebisch conclusion that “The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs” is a succinct analysis of why Baker failed.

Brady began from a sharp understanding of Baker. The personal histories of the two men are relevant. Baker was a career influence peddler who inherited one place at Princeton and another in his father’s Texas law firm, a vital segment in the pipeline of flow of subsidies from Washington to Houston. Brady was an investment banker and, apart from a brief appointment to the US Senate from New Jersey in 1982, had worked in finance for more than 30 years before drifting into the final months of the second Reagan administration as USTS in the fall of 1988. He continued to serve as Treasury Secretary in the George H. W. Bush administration (1989-93). Brady, from three decades of personal experience, would have understood finance, on the lender and borrower sides, in ways that Baker did not.

How was Brady different from Baker ?

The core Brady insight was that significant relief on debt service--the liquidity/solvency problem of the borrower--required that the lenders bear some of the costs. Brady’s second insight was that institutions other than the lenders could be made to pay some of the lenders’ costs.

SB observe that Brady achieved successful workouts by: offering a real discount to the borrower; providing adequate liquidity in the exchange bonds (” ... [allowing] illiquid and transparent claims to be converted to marketable securities”), which unlike the bank loans of the Baker era, were tradable; by securing upfront financing from multilateral lenders, notably the IMF and the World Bank, to make the transaction attractive to the lenders by giving them some initial cash that the borrowers would not have been able to commit on their own; and by creating a “diversification of creditors”.5 The diversification effect though it did generate a new, broader, interest in what is now called “emerging markets” (EM) debt has created a secondary cost, which are the deep conflicts of interest between old and new creditors. Another feature of the modest Brady success, which was immediately forgotten in the moralizing 1995-2010 Heavily Indebted Poor Countries (HIPC)/Multilateral Debt Relief Initiative (MDRI), was that it was a transaction. The Brady Plan, perhaps reflecting the practical character of its author, wasted no time on lectures to the borrowers about “sustainability” and was therefore able to close deals more quickly than did many of the HIPC/MDRI cases.

What did Brady achieve ?

The Brady plan was active from the restructuring of Mexico (February, 1990) to that of Poland (October, 1994). SB find that “ ... the Brady Plan helped achieve fast and durable debt stock reduction for Brady restructurers with [other] macroeconomic dividends”. SB derive functions in which they estimate Brady effects in the treated sample—Mexico, Costa Rica, Venezuela, Uruguay, Nigeria, the Philippines, Argentina, Jordan, Brazil, Bulgaria, Dominican Republic, Poland, Ecuador, Panama, Peru, Vietnam, Cote d’Ivoire—compared to a control group of countries that did not do Brady restructurings. The core empirical findings are in Table 8 of SB where average workout effects (three specifications over 10-year periods) are

Public debt: -18.5%

External debt, -20.0%

Real GDP, 20.2%

FDI stock, 7.1%

An average gain in cumulative real GDP of 20.2 % over 10 years is not too much when expressed in per capita terms. The mean gain in FDI stock of 7.1% would be negative in per capita terms. The FDI stock variable itself ignores questions about its fiscal costs (What legal and fiscal incentives were given to investors ? Was there crowding out of domestic investments ?). In addition, while the stocks of public and external debt seem to have fallen in real terms these results tell us nothing about the NPV of debt service of the exchange instruments compared to that of the defaulted ones.

What Shenai and Bolhuis miss

Shenai and Bolhuis don’t apply their own insights. They repeat a workable definition of “insolvency”—when the NPV of debt service is greater than the NPV of primary surpluses—but never apply it, even to such obvious cases as Argentina (which has had a primary surplus once in this century).

I wont harass Shenai and Bolhuis too much about their econometrics, but some findings depend on fairly dreamy abstractions from the politics of their treatment sample, which vitiate any notion of random selection in who got Brady and who didn’t. One sees friends of the US in the treated group—Mexico, Costa Rica, the Philippines, Jordan, Panama. One understands the urgency of helping Poland in 1994. Oil would always have been a consideration with Nigeria (1991) and Venezuela (1992). Sustaining Brazil’s (April 1994) emergence from a military dictatorship might have helped with some of the Clinton people, though Rubin and Summers seem to have blocked any twee notions of giving Brasil a serious discount. 6The French leaned hard on the World Bank to get a Brady deal for Cote d’Ivoire (drafted in November 1996; closed in March 1998). In a related move, France manipulated the HIPC-eligibility process to include Cote d’Ivoire on terms that had been custom made for that country, thereby allowing some HIPC debt relief to cross-subsidize the exchange bonds.

SB results depend on excluding some large data points. The writers omit the most important restructuring of the Brady period, that of Mexico in 1995 7 They don’t discuss Argentina’s workout (2000-2002 and still being fought in the courts today) or its most recent (2020-2022) deal and ignore the nasty politics elucidated in Makoff’s book on Argentina.8

SB give the IMF and the World Bank a pass on several problematic countries (Senegal, Argentina, Zambia). They don’t understand why the Common Framework is going nowhere—half-measures have multiplicative effects, not additive ones—and will never go anywhere. In apparent homage to the old days of high finance, SB do not mention corruption.

The lessons of Brady

SB understand that the Brady lessons of the 1990s are largely applicable to the mid-20s. The Brady terms—a discount to the borrower, tradable exchange bonds, concessional upfront financing—remain. Diversification of creditors was, on the other hand, a disadvantage until the emergence of collective action clauses early in this century. The contrast between the epic Argentine workouts of the first 20 years of this century (no CACs), and the country’s 2022 workout (effective CACs), is telling.

Why the lessons of Brady no longer apply

The weights of global borrowing and lending have shifted. Volumes and type of debts have changed. There are new lenders, new borrowers, new borrowers in distress, new loan currencies, and, of course, faster methods of fleecing the suckers through rapacious asset grabs (debt for nature swaps being one).

The period of falling long-term rates (which SB do mention) has come and gone. Stimulative effects of falling rates, a factor in successful restructurings, have weakened. The reflexive remedies of SB—more lender and multilateral “coordination”, “learning”, those prefered opiates of donors with nothing better to do—incur costs and may even be counterproductive if they give blocking vetos to small, annoying donors.

Another HIPC/MDRI is needed

One has some difficulty in discerning the point of this book—proposed as a reanimation of Brady—beyond stroking IMF management. The conditions for Brady no longer exist and will not return. The book’s evidence is not strong. Its claim to generality is weak as it did not even try to discuss today’s debt crisis, which is that of low-income countries. SB belabor obvious points—“... any systemic debt relief initiative would require a willing sponsor, likely a sovereign or international financial institution, to underwrite the plan and provide enhancements to induce participation”—without noting that generous sponsors (the donors to the HIPC Trust Fund) were why HIPC/MDRI achieved what it did and without noting that such sponsors no longer exist.

SB “ ... emphasized the need to manage the reputational risk of requesting a restructuring ... “ One wonders what further damage could occur to the reputational risk of countries whose debt trades below $0.50. They continue with the need to “ ... address the potential holdouts through a mix of carrots and sticks. “ The vulture funds must have found this amusing; Nick Brady, former chair of Dillon-Read, might have brandished a stick in 1989, but this is unlikely today given the grip of certain interests on today’s courts.

One has the impression that Shenai and Bolhus worked under the famously benign supervision of Fund management, whose editorial practices today most closely resemble those of Pravda in the time of Brady. It is true that the Fund needs a new role, one less intimately coupled with the interests of the crooked governments of Argentina, Egypt, Pakistan, Senegal, Cote d’Ivoire (and others), one which forces it to use its resources in the global interest, but a book such as this one, which has neglected so much of importance, is not a credible tool to define that role.

We need something radically different from Brady and we wont get it by counting on the visionary leadership of the IMF or of the private banks.