It was not until 1989 that the then US Treasury Secretary
Nicholas Brady proposed his debt reduction plan that was
eventually adopted for debt-ridden countries across Latin
The plan was especially innovative in its use of a
menu-styled creditor opt-in programme, important considering
a long list of diverse financial obligations. Creditors could
choose to convert their loans into bonds or provide new
loans, for instance.
The Plan, which was overseen by the International Monetary
Fund and World Bank, is widely understood to have been more
successful than the loans provided earlier in accordance with
economic reform requirements that might have slowed down
"Mexico completed the first Brady plan, and would've put
restructuring behind it had it not been for the tequila
crisis a few years later," Debevoise said.
Payback options for creditors were developed during
negotiations with a geographically representative bank
advisory committee composed of the commercial banks with the
largest exposure to Mexican debt obligations.
The bonds issued to creditors in exchange for loans were
backed by funds held at the IMF and the World Bank, with US
Treasury bonds securing principal and interest payments on
the restructuring plan bonds.
To Debevoise, Mexico's international debt relief programme
was the bellwether case for sovereign debt restructuring.
Even so, he explains, there were a lot of technical issues
to resolve. These included determining which debt would be
excluded from private creditor negotiations, whether trade
debt would be excluded (it was), and how to treat financings
for moveable assets such as oil rigs.
Mexico's perfect storm
Mexico was able to service its debt in the years leading
up to the crisis because of rising oil prices. Interest rates
rose to record highs during the early 1980s as the US Federal
Reserve sought to curb inflation. And the perfect storm hit
Mexico, and Latin America generally, when petroleum prices
declined and debt payments rose.
Just when Mexico seemed to have recovered from the debt
crisis, its currency saw a sudden devaluation in December of
1994 amid growing concern over the quality of bank loans.
Quality capital reserves were further depleted by a run on
Mexican bonds denominated in US dollars.
There were a lot of troubled banks that were liquidated by
regulators or merged into healthier banks as the authorities
sought to stabilise the banking system.
Mexico and other Latin American countries adopted more
stringent capital and loan restrictions in the years that
proved helpful when the US banking system tailspinned
during the 2008 subprime mortgage crisis. Latin American
banks largely avoided those types of investments.
"The regulation of banks became reasonably strict in terms
of the levels of capital required," Debevoise said.
"[Mexican] banks were not allowed to leverage the way banks
in other countries did."
"[The crisis] lead ultimately to stronger economic
fundamentals and a stronger appreciation among politicians of
the need to retain a stronger banking system," Debevoise
said. "Those lessons subsequently resulted in greater growth
in those economies and more resiliency."
The Brady Plan has been discussed as an alternative to the
European Central Bank's bailouts of sovereign debt. It might
make less sense for the eurozone because most outstanding
debt for distressed European countries is in the form of just
one type of sovereign bonds rather than syndicated loans,
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