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

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

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. $)% of GDP (b) (b) Latin America and the Caribbean Argentina Chile Mexico 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. $) Net capital inflows Terms-of-trade effect Rate of growth of GDP (%) Source: ECLAC. Graph on page 248 in Ffrench-Davis and Griffith-Jones (1995)

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