Making the Brady Plan Work

Courtesy Reuters

The Bush Administration has changed the direction of U.S. policies on Third World indebtedness. The new initiative, announced by Treasury Secretary Nicholas F. Brady in March 1989, calls on U.S. commercial banks to accept an orderly process of debt reduction, and calls on the international financial institutions-the International Monetary Fund (IMF) and the World Bank-to support this process through changes in their lending policies.1 The plan implicitly recognizes that many debtor countries will be unable to repay their commercial bank debts in full, even if repayment is stretched out over time. The focus on cutting the debt burden contrasts sharply with earlier Treasury policies, under both Donald Regan and James Baker, which had held that eventually all of the commercial bank debt should be repaid on market terms.

The Brady Plan is a welcome shift, although to date the proposal's details have remained vague. The general mechanism for achieving debt reduction called for in the new plan is for creditor banks to agree voluntarily to reduce the value of their claims (either through a cut in principal or interest) in return for guarantees on the remaining portion of the debt. In the Treasury's view of the negotiations between the banks and the debtor countries, the banks are to be presented with a "menu of options" of debt reduction mechanisms. The banks will be free to choose one of these, but they may decide to hold on to the existing debt (perhaps with some commitment to make new loans) in the belief that they will be repaid eventually.

To encourage the banks to accept debt reduction rather than hold their debt, the IMF and the World Bank are called upon to help finance the guarantees, either by providing collateral on the reduced value of the debt or by giving debtor governments financial support to repurchase their debt directly for cash. These international institutions have agreed to provide up to $25 billion over three years, and Japan has committed $4.5 billion.

The Treasury has

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