The Success of the Brady Plan - Research Paper Example

Sur Here Review of Literature on Brady Plan Introduction In March 1989, Nicholas Brady, the newly appointed U.S. Treasury Secretary, introduced the Brady Plan. The plan revealed a delayed realization by the United States that the debt crisis cannot be addressed merely at the procedural scale of making sure short-term debt servicing by Third World economies and involved difficult political judgments to trim down total debt size so as to produce factors for economic development (Buckley 2009, 40). It eventually became apparent that current terms were not generating the needed outcome. Moreover, the plan expressed interest in the prospects of developing economies in Latin America. According to Rosen (2008, 102-103), this period built a new government in the U.S. and saw the democratic elections in Uruguay, Chile, Brazil, and Argentina, and the establishment of new administrations in Venezuela and Mexico. Within this setting, cutting down debt was one method to bolster developing economies in Latin America. Consequently, these countries take advantage of democratic transformation as a bargaining ticket to gain more favorable debt arrangements. These countries, as developing Surname Here 2 democracies, thought that pressing for inflexible strictness and full debt settlement would estrange newly entitled voters and threaten the continued existence of democratic governments (Hiatt 2009, 388). In September 1985, President Garcia remarked quite frankly that “We are faced with a dramatic choice: it is either debt or democracy” (Maswood 2008, 94). In view of this, the objective of this research paper is to analyze the status of the Brady Plan after 23 years of its implementation with a focus on Brazil and Mexico. In particular, this paper tries to answer the question, how did the Brady Plan help solve the problems faced by Mexico and Brazil as a result of the Latin American debt crisis? The Brady Plan The success of the loan industry ended in 1982 due to the emergence of the debt crisis, raising alarm on global markets (Buckley 2009, 54). This bleak condition forced several international financial organizations to generate a remedial program, which may function to prevent a potential disaster. This mission engaged the government of the United States, but not, at the outset, as the major player. Basically, the Brady Plan included a rigorous debt assistance program where industrial banks may select from a list of debt-stock reduction and new currency selections, practiced within the context of policy contingency (Iqbal & Kanbur 1997, 25). In actual fact, not many industrial banks were eager to grant a new currency loan, and the Brady Plan has mostly been cutting down of debt, with commercial debt stocks generally decreased by 45% (Iqbal & Kanbur 1997, 25). Economies under the Brady Plan hence present practical cases of the impacts of debt reduction on capital/investment flows and economic outcomes. Surname Here 3 The Brady Plan was simply another program to implement ‘voluntary debt relief’ (Hiatt 2009, 388), a policy that had been tried previously, in 1988, through the debt-bond and debt-equity swaps. The major change included assigning the World Bank and International Monetary Fund (IMF), alongside loaners and debtor countries, sponsors of interest and principal payments on the exit bonds. Michel Camdessus, the Managing Director of IMF, supported the Brady Plan (Dadush, Gupta, & Uzan 2000, 117). He gave his support to the debtors, declaring that countries eager to endorse domestic developments “need to be able, from the outset, to count on a more adequate alleviation of the present drag of debt-service payments on their adjustment efforts” (Dadush et al. 2000, 117). Both Camdessus and Brady refused to endorse an elimination of economic and debtor adjustment programs. Somewhat the opposite, debt reduction would be fully granted to countries with background of steady economic development, but with constantly declining economies like Mexico. Reduction of debt was intended to function as an inducement and a supplement to adjustment. However, the plan embodied a more resilient stance for IMF as regards to debt rescheduling (Dadush et al. 2000, 117-118). According to Aggarwal (1996, 36), along with other strategies, it allowed the termination of adjustment plans. In April 1989, at the convention of the Interim Committee of the Board of Governors, the Finance Ministers endorsed the Brady Plan, suggesting that the Fund use its assets to make debt reduction possible for nations executing economic developments. Nevertheless, while the Brady Plan was focused on average economies mostly indebted to industrial loaners, empirical findings may have inadequate importance to heavily indebted poor countries (HIPCs). There exist a number of studies on the initial Brady arrangement (Rieffel 2003, 178). Several broad assumptions arise. According to Rosen (2008, 103), foremost Surname Here 4 is the integral function of macroeconomic strength in economic developments carried out prior to debt reduction; moreover, the most important way by which debt reduction influences development is via uncertainty or risk mitigation. Berthelemy and Vourc’h (1994 as cited in Iqbal & Khan 1998, 43) study the effect of the transaction between Mexico and the Brady Plan. They employ a standardized simulation technique concentrating on three major prices, namely, (1) the real exchange rate, (2) debt price on the secondary market, and (3) domestic interest rate. They assume that the Brady Plan accelerated rehabilitation and drove out the insecurities that were hampering the successful completion of the new economic development initiative early in 1989 (ibid, p. 43). Furthermore, they hypothesize that if Mexico ignored its macroeconomic and fiscal weaknesses before the Brady Plan, the debt relief acquired would be weak to be able to revive a recovery of progress and good credit standing. Claessens and colleagues (1993 as cited in Iqbal & Khan 1998, 43) and Oks and van Wijnbergen (1994 as cited in Iqbal & Khan 1998, 43) arrived at the same findings in their study of the effect of the Brady arrangement in Mexico, emphasizing the effect of uncertainty. They assume that the effect of the Brady arrangement emerged not mainly via decrease in external transfers but via the reality that the transaction reduced uncertainty related to frequent incomplete rescheduling. The IMF corroborated these findings in their studies of the private investment pattern in eight underdeveloped and developing countries, namely, Thailand, Senegal, Morocco, Mexico, India, Ghana, Chile, and Bangladesh (Hiatt 2009, 388-389). Even though the study was not able to find debt overhang outcome on investment, IMF assumes that circumstantial data indicate that a prior ruling of the debt load of these countries would have produced a quicker return in Surname Here 5 investment via the reduction of country-risk interest rates and premiums and uncertainty mitigation (Krayenbuehl 2001, 4). Several scholars and agencies, such as Cline (1995), World Bank (1993), and the IMF (1992-95), examine the impacts of the Brady Plan on other countries like Venezuela, Brazil, Argentina, and so on (as cited in Darrow 2006, 325). These researchers reported that secondary market rates for debt increased on the whole. For instance, Cline (1995, 151) reported that after the Brady deal in Argentina the country-risk distribution for the country dropped significantly. Likewise, there was a significant reversal in the flow of private investment to almost all countries, normally during the Brady deal (Darrow 2006, 325-326). As stated by Maswood (2008, 95), in 1990, this occurred in Venezuela, but the flows of private investment to the country by 1992 declined once more after errors in policymaking—revealing another time the value of a strong policy paradigm for debt adjustment to wield a favorable effect on the flows of private investment and development. The outcome of the Brady Plan shows that a key advantage of rigorous debt reduction may be to strengthen certainty in the policy development process carried out by those in power in the debtor country: within this point of view, the eagerness of industrial creditors to approve debt adjustment is seen by foreign shareholders as a ‘recognition’ by the international fiscal body that the country is effectively implementing structural improvement and macroeconomic strategies (Dadush et al. 2000, 117-118). According to Hiatt (2009, 391), this recognition facilitates improved movement of foreign investment that encourages development. These concerns indicate that suggestions of heightened debt reduction for HIPCs could merely have favorable impacts on economic outcomes identified in the Brady agreements if they are recognized by Surname Here 6 global investors as a promotion of an intense and successful initiative toward economic change and security. Mexico, which had announced near economic failure in 1982, was highly controversial among a large number of top elite groups and bankers who convened in the IMF, and there was a heavy apprehension about the problem this condition would generate for global financial markets (Rosen 2008, 103). With the implementation of the Brady Plan, starting with Mexico, it became apparent in 1988 that the U.S. Treasury was enlarging its involvement in the mitigation of the debt problem so as to secure global financial markets and guarantee financial institutions that they would regain their funds. The Mexican debt adjustments represented the achievement of the union of the global private financial institutions, the U.S. Treasury, and the IMF in guaranteeing constant debt-service settlement of Mexico and simultaneously pushing a major reorganization of the public sphere, as well as foreign trade liberalization and state venture privatization (Maswood 2008, 93). This group of neoliberal strategies, which was, partly, the by-product of the debt problem and which was used in numerous developing economies, became recognized as the Washington Consensus (Rosen 2008, 103). When the Washington Consensus or, neoliberalism, was implemented by almost all financial and political leaders of Latin America, it became feasible to implement new agendas of financial structuring such as the Brady Plan, which, as projected, may contribute to the effective compromise of debtor countries and many global financial institutions (ibid, p. 103). The early periods of the debt-relief program that would turn out to be the starting point of the Brady Plan were discussed by President Miguel de la Madrid. Hence, the Brady Plan became effective for the debt of Mexico in 1989, functioning as the central paradigm for later financial Surname Here 7 deals in majority of other countries in Latin America (Rosen 2008, 103). Moreover, the Brady Plan largely contributed to the implementation of ‘equity finance’ in developing countries (Rosen 2008, 103). Bulk of the resources that started to flow into Mexico in 1990 originated from mutual funds and retirement funds not focused on purported developing economies, but a considerable sum was from Mexican tycoons as well who had deposited huge amounts of money in offshore banks or in the United States (Rieffel 2003, 174). As further stated by Rieffel (2003, 174-175), a key inducement for the recovery of these resources for Mexico was the privatization of many state-held commercial and financial institutions. After several years of disappointing and wearisome debt compromises the Brady Plan introduced a new component of practicality into the dialogues as it recognized that the initially acquired debt was not valued in its original worth anymore (Krayenbuehl 2001, 4). In addition, the Brady Plan recognized the presence of country risk as loaners were to fail to benefit from their investment, or to obtain a ‘reduced non-market rate-related debt servicing cash flow and had to extend the maturity of their exposure way above the original intention’ (Krayenbuehl 2001, 4). In contrast debt repayment was assured by premium treasury bonds. The Brady deal had further key implications for the prospect of cross-border subsidy since the countries which had acquired a Brady debt deal were reforming their economies and had to undergo structural adjustment program (SAP) (Buckley 2009, 74). In addition, according to Buckley (2009, 53), it facilitated the entry of the private sector into the global investment markets. Global economic situations were profoundly influenced by another worldwide petroleum impasse in 1979, when the prices of oil climbed by 50 percent. As the strains of inflation mounted, the developed economies increased interest rates considerably (Rieffel 2003, 153). The Surname Here 8 direct effects of the anti-inflationary strategies were decrease in the appeal of venturing in the resources of developing economies, and a narrowing of the global trade (Rieffel 2003, 153-154). Due to their worldwide scope, these occurrences brought about a recession in international credit, decreasing the flows of investment to developing economies and creating uncertainties about their ability for repayment (Hiatt 2009, 391). The mixture of these impacts had catastrophic outcomes for the payment balance of those countries, particularly the countries in Latin America which were highly indebted. Thus, the common arrangement of later Brady agreements was derived from the Mexican deal; disparities arose largely in relation to debt reduction percentages, or inclinations of final banks, interest rates, and new currency terms. Brazil was one of the countries which followed the Mexican Brady agreement (Rieffel 2003, 115). Citibank, as a reaction to the non-repayment of Brazil in 1987, declared that it was accumulating its loan-loss treasury. This decision diminished not just the bargaining status of Brazil with Citibank, but as well as that of every HIPC Citibank handled. Moreover, it encouraged other commercial financial agencies to tag along, hence diminishing more the bargaining status of developing countries (Rieffel 2003, 119). According to Maswood (2008, 96), the reaction of the financial institutions to the failure of Brazil to pay and the likelihood of non-repayment by other debtors took place without major formal mediation. Hence, by the time of the launching of the Brady Plan, growth in market-oriented debt reduction was evident. Due to the diminished negotiating status of the debtor countries in relation to financial agencies, furthermore, and their declining national economic conditions, debtor countries had virtually no choice but to launch actual market restructuring. The direct impact of the Brady Plan on Brazil and other debtor countries, nevertheless, was to postpone that Surname Here 9 pattern (Maswood 2008, 96-98). Ultimately, from the point of view of the 1990s, it is useful analyzing whether the objectives of the Brady Plan were realized. The most trustworthy and usually praiseworthy evaluations of the Brady Plan were introduced in 1995 by William Cline. Cline (1995, 115-118) discusses the achievement of the Brady Plan by assessing the outcomes of Brady nations as regards to return to capital markets, reduction of interest rates, stability of prices, and economic development. Unfortunately, it seems that there is no relationship between favorable economic markers and Brady Plan agreements. Several Brady nations such as Mexico and Argentina achieved fairly good outcomes, whereas others, like Nigeria or Venezuela obtained depressing outcomes; Brazil, on the other hand, had performed unsteadily (Barbone et al. 1997, 28-30). Obviously, numerous other aspects in addition to the Brady Plan influence the economic path or development of a country. It is exactly due to this that the Brady Plan is inconclusively triumphant. Conclusions Whether the Brady Plan was a favorable or unfavorable occurrence remains debatable. Numerous financial institutions and several other scholars think that debt relief was needless for the leading debtor countries in Latin America. Numerous others think that the debt relief provided by the Brady Plan was heavily restricted and that the hardships brought about by balancing the Brady bonds is unbearable. From another point of view, several researchers have discovered that the debt programs of the Brady Plan for specific developing nations have had favorable impacts on economic outcomes, mostly by mitigating insecurity or uncertainty, but merely when led by a phase of solid and sound policy changes. In conclusion, even though the assumption that highly indebted countries endure considerable negative impacts from debt Surname Here 10 overhangs is open to doubt, findings from developing economies does indicate that large outside debt could contribute to the delay in progress and capital flow, and that reduction of debt can have favorable outcomes if the policy paradigm is appropriate. Works Cited Aggarwal, Vinod. Debt Games: Strategic Interaction in International Debt Rescheduling. Cambridge: Cambridge University Press, 1996. Barbone, Luca & Lorenzo Forni. Are Markets Learning? Behavior in the Secondary Market for Brady Bonds, Issue 1734. Washington, DC: World Bank Publications, 1997. Berthelemy, Jean-Claude & Ann Vourc’h. Debt Relief and Growth. France: OECD Publishing, 1994. Print. Buckley, Ross. International Financial System: Policy and Regulation. UK: Kluwer Law International, 2009. Print. Cline, William. International Debt Reexamined. California: Institute for International Economics, 1995. Print. Dadush, Uri., Dipak Gupta, & Marc Uzan. Private Capital Flows in the Age of Globalization: The Aftermath of the Asian Crisis. UK: Edward Elgar Publishing, 2000. Print. Surname Here 11 Darrow, Mac. Between Light and Shadow: The World Bank, the International Monetary Fund and International Human Rights Law. Portland, Oregon: Hart Publishing, 2006. Print. Hiatt, Steve. A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption: Easy read Edition. San Francisco, CA: ReadHowYouWant.com, 2009. Print. Iqbal, Zubair & S.M. Ravi Kanbur. External Finance for Low-Income Countries. Washington, DC: International Monetary Fund, 1997. Print. Iqbal, Zubair & Mohsin Khan. Trade Reform and Regional Integration in Africa. Washington, DC: International Monetary Fund, 1998. Print. Krayenbuehl, Thomas. Cross-Border Exposures and Country Risk: Assessment and Monitoring. England: Woodhead Publishing, 2001. Print. Maswood, Syed Javed. International Political Economy and Globalization. London: World Scientific, 2008. Print. Rieffel, Lex. Restructuring Sovereign Debt: The Case for Ad Hoc Machinery. Washington, DC: Brookings Institution Press, 2003. Print. Rosen, Fred. Empire and Dissent: The United States and Latin America. New York: Duke University Press, 2008. Print. Surname Here 12 PDF to Word Read More