1. 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

2. 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

3. Main features of Brady Plan 3 options offered Different features: Mexico and Costa Rica GDP-Linked Bonds Total level of debt forgiveness relatively limited

6. 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.

7. Net Capital Flows in Latin America Total Net Flows billions of U.S. $)% of GDP 1971- 1981 1983- 1990 1990- 1991 1992- 1994(b) 1971- 1981 1983- 1990 1990- 1991 1992- 1994(b) Latin America and29.49.627.861.14.51.32.65 the Caribbean Argentina1.91.41.110.622.10.65.1 Chile2.61.52.33.112.777.37.8 Mexico8.20.816.325.25.10.26.38.5 Source: ECLAC (1994, chapter 9). Graph on page 235 in Ffrench-Davis and Griffith-Jones (1995)

8. Macroeconomic indicators for Latin America Amount (billions of 1980 U.S. $) 1976-19811983-19901991-1993 Net capital inflows32.78.946.3 Terms-of-trade effect5.530.354.2 Rate of growth of GDP (%)4.61.63.3 Source: ECLAC. Graph on page 248 in Ffrench-Davis and Griffith-Jones (1995)

10. 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