How Brady worked and why
London, ISA-CAF, 20 Feb 2012
Professor Stephany Griffith-Jones
Financial Markets Program Director at
the Initiative for Policy Dialogue
sgj2108@columbia.edu
www.stephanygj.net
www.policydialogue.org
Reasons for Brady Plan
• Debtor impatience; lack of symmetry of
sacrifices
• Strong intellectual case
• High provisioning of banks; makes banks less
vulnerable
• Political changes in Latin America
Main features of Brady Plan
•
•
•
•
3 options offered
Different features: Mexico and Costa Rica
GDP-Linked Bonds
Total level of debt forgiveness relatively
limited
Figure.4
Dynamics of the Latin American External Debt
(% of GDP and exports)
450%
60%
400%
50%
350%
40%
250%
30%
200%
150%
20%
100%
10%
50%
% of exports
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0%
1970
0%
% of GDP
Source: Authors' calculations based on data of external debt from The World Bank, and nominal GDP
and exports from ECLAC historical series. The data for 2010 were updated with the growth rate of
debt according to The World Bank.
% of GDP
% of exports
300%
Impact
• Hard to assess
• Unexpected return of new flows, different
from bank lending.
• Later lead to problems, especially Mexico,
Argentina
• Recovery of growth in Latin America
immediate, though not very high.
• Build-up of bank and other flows to E. Asia
leads to crises.
Net Capital Flows in Latin America
Total Net Flows billions of U.S. $)
1971- 1983- 19901981 1990 1991
% of GDP
1992- 1971- 1983- 1990- 19921994(b) 1981 1990 1991 1994(b)
Latin America and
29.4
9.6
27.8
61.1
4.5
1.3
2.6
5
the Caribbean
Argentina
Chile
Mexico
1.9
2.6
8.2
1.4
1.5
0.8
1.1
2.3
16.3
10.6
3.1
25.2
2
12.7
5.1
2.1
7
0.2
0.6
7.3
6.3
5.1
7.8
8.5
Source: ECLAC (1994, chapter 9). Graph on page 235 in Ffrench-Davis and
Griffith-Jones (1995)
Macroeconomic indicators for Latin
America
Amount (billions of 1980 U.S. $)
1976-1981
1983-1990
1991-1993
Net capital inflows
32.7
8.9
46.3
Terms-of-trade effect
5.5
30.3
54.2
Rate of growth of GDP (%)
4.6
1.6
3.3
Source: ECLAC. Graph on page 248 in Ffrench-Davis and Griffith-Jones (1995)
Figure 2
Net Resource Transfer
(% of GDP at current prices)
4%
2%
0%
-2%
-4%
-6%
% of GDP
Source: Estimates based on ECLAC data.
Via FDI
Via financial flows
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
-8%
Implications for Europe
• Need for international orderly debt workout
mechanism more evident
• If debt problems not quickly solved, growth
sacrificed
• Talk of lost decade in Europe
• Combination of drastic austerity, no debt
reduction leads to major recession in spite of
large official flows
• Private debt becomes public debt