Piotr Brzezinski

The Brady solution to the Euro-crisis

It was a busy weekend for euro-crisis observers. Mario Draghi, an Italian member of the European Central Bank, was finally appointed as its new President; Mervyn King, Governor of the Bank of England, acknowledged that the European sovereign debt crisis is a ‘material threat’ to British banks; David Cameron announced that Sir Jon Cunliffe, a Treasury civil servant, will be the UK’s next ambassador to the EU; and, according to reports, French banks have laid plans for a ‘Brady bonds’-style solution to Greece’s troubles.  

In the short run, the last of these will be the most important. Named after US Treasury Secretary Nicholas Brady, the innovative Brady Bonds programme helped solve the 1980s Latin American debt crisis. Under the programme, private creditors voluntarily swapped their loans for bonds, thereby lightening the debtor countries’ repayment burden. To incentivise this swap, the debtor countries provided ‘enhancements’ to the new bonds, usually Treasury bonds that were purchased and held in escrow for release in case of default, a financial hostage of sorts.

This process bought participating countries time to re-establish their economic footing and grow their way out of economic crisis, while avoiding the pains of a default. Although Ecuador defaulted on its Brady bonds, Mexico, the Philippines, Colombia, Brazil and Venezuela all paid them back.    

To mimic the Brady Bonds model, the French proposal suggests that current creditors voluntarily roll-over 50 percent or more of their maturing Greek bonds to long-dated (e.g., 30-year) bonds and collateralize these new bonds with high-quality securities that will pay-out in case of default. (A variant on this plan was also recently suggested by the Center for Financial Stability in New York.)

Giving Greece a de-facto haircut could buy the state breathing space to get its finances in order; creditors would benefit from an insurance policy on their new bonds and, in theory, a reduced chance of default. 

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