Protection of the Poor and the Millennium Development Goals
Chapter 2: Brief History of Debt Management After 1989
After the need for debt reduction had finally been officially recognized – much too late, and after considerable damage had been inflicted on debtors by creditors delaying this decision – reality still remains to be faced fully. One important weak point of the ‘Brady Plan’ was that only one group of creditors, commercial banks, had to face losses. Official creditors remained exempt. In spite of the routinely used name, this proposal originated in a debtor country. It was first made by the Brazilian Finance Minister, Bresser Pereira, and immediately turned down by the US Treasury. Later Japan’s Finance Minister, Miyazawa Kiichi, supported it before it became the ‘Brady Plan’. ‘Brady reductions’ were implemented under BWI guidance, a new task for the BWIs which made them discard the illiquidity theory immediately. Understandably, banks were not keen to follow Brady’s proposal. Treasury Under-Secretary Mulford warned commercial banks that they might face ‘a legislated or mandated solution to the problem that may be very much more unpleasant’ if they refused to reduce parts of their loans ‘voluntarily’. The first tangible product of the Brady initiative, the Mexican agreement, was reached under prolonged pressure by the US government. With some prodding commercial banks exchanged old syndicated debt for new bonds (securitization) at a discount of 35 per cent. Three options existed: capital stock reduction, equivalent reduction in interest rates (‘par bonds’) and new money (chosen by 13 per cent). It remains difficult to see how new money can be equivalent to debt reductions – either via cuts...
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