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In their own words. (Charles H. Dallara)

Jul 1, 1998

Charles H. Dallara, Institute for International Finance
From 1988 to 1991, Charles Dallara served as US assistant Treasury secretary-first, for policy development and later for international affairs-and was a key player in the Treasury team that put together the debt reduction strategy known as the Brady Plan. Dallara left the Treasury in 1991 and spent two years at JP Morgan. Since July 1993, he has been managing director of the Institute for International Finance.
In your view, why was the Brady Plan so timely?
Well, those of us involved in the debt strategy at the Treasury in 1987 and 1988 saw the Baker debt strategy was on its last legs, for really two reasons: first, the adjustment fatigue was becoming heavy even among the better-managed economies, especially Mexico; and second, the banks were becoming less and less cooperative. Even when they got a good IMF program to support them they were being very niggardly on the money and very difficult on the rescheduling part. Neither side clearly saw it as easy to continue to work together within the old framework, so there was at the Treasury a growing recognition that something had to change.In 1988, at the G-7 summit in Toronto, the Japanese put the so-called Miyazawa Plan on the table, which sparked some intense debate in the Treasury as to whether or not we should contemplate some approach involving debt reduction. At the time, Secretary Baker was not ready to look down that road. So we did what we could to keep the Baker strategy alive. But clearly it was fragmented, and we felt that we probably would not be able to indefinitely hold off one of the major countries going into default.
So what happened when Brady took over from Baker?
In the fall of 1988, we went through another sharp downturn in oil prices and it hit the banks really hard again. At the time, we had begun to engage in yet another round of discussions when Pedro Aspe came to the Treasury asking for our support-he did not want to have another IMF program. And that's when Brady arrived at the Treasury and that marked a real turning point.In early September, when David Mulford and I and other staff were personally briefing Brady on what was then the Treasury's debt strategy, he knew virtually nothing about it. And he listened to our views-we were preparing him to go to Berlin for his first G-7 meeting-a big event and there was a lot of pressure. And after the briefing he didn't say much, and then later that day I remember him wandering down the hallway to my office: "Dallara," he said, "this debt strategy is a train wreck waiting to happen. You don't really believe this is going to work, do you?" And I said, "Well, we've been looking for the opportunity to make a shift here for a period of time." And we were ready to do it-David Mulford and I had done a lot of thinking on it, though David deserves the credit for spearheading it internally at Treasury. And he said, "Well, go to it." And so that fall we began an extensive effort to develop a new approach based on debt reduction.
This must have come just after Salinas was elected in Mexico?
Yes. And Aspe came a number of times during that period of October and November and we could say very little, if anything, to anyone about the work going on at the Treasury Department. I remember having these surreal conversations with Angel Gurria, who was a key player in the Mexican Treasury at the time, because they were also looking at debt reduction scenarios and default scenarios. We wanted to let them know that we understood a change probably had to take place, but that we were not in a position to put it on the table yet, because we hadn't talked to the White House and they would face problems with the G-7 if it got out. So there was a delicate period when the Mexicans were toying around with some fairly plausible ideas, and we were as well. But we were unable to sit down and communicate with them about it.
How did you get the plan past opposition in Congress and the banks?
A lot of the success had to do with Brady's sense of the need for a new direction, his willingness to give us some flexibility and leeway in shaping the proposal, and then his willingness to push it through. He really showed some extraordinary leadership in getting it through some very difficult meetings at the White House. I remember some very difficult discussions there with people who felt very strongly about the potential political fallout, you know, "bailing out the banks" kind of talk.Even those of us who knew it wasn't really a bank bailout knew it would be perceived as one. There was also a concern that we were putting the country through another deflate and devalue scenario. Some in the Republican party considered any movement of the exchange rate to be anathema, among them (Bush's chief of staff) John Sununu, although he came around later.But there were some sensitive discussions at the White House in the fall of 1988 and early 1989. Even the night before Secretary Brady gave his March 10 speech at the State Department to launch the strategy, we still had people in the US government who were pulling at it, clawing at it, trying to pull it apart, trying to modify it. But he remained steadfast. Mind you, when this was launched it was by no means broadly supported. I remember getting in the elevator at the State Department the day Secretary Brady announced it in his speech. Paul Volcker was in the elevator, and grumbled to me something like, "I hope you understand what this will do to the US economy." He was not at all supportive of it.
So the Brady team was pretty much out there on its own?
Other than a small band of warriors at the Treasury Department and, of course, the debtor countries. There were not many in either the US government, the G-7 or the banking community who really felt that what was needed was a new beginning. We were told that this was the end of the financial system as we know it; that we were sanctioning non-payment, we were sanctioning default, we were sanctioning "deadbeat" behavior. We had some tense discussions at the Treasury Department at the time of the spring meeting of the World Bank. We invited some US bankers down to the Treasury for a luncheon meeting and it was venomous. Venomous is the only word to describe it.
Are there any memorable moments or turning points in those first Brady negotiations between the banks and the Mexicans?
There were two: first, there was an IFC meeting in Madrid in the spring of 1989 and that was a critical environment for advancing the negotiations. I was there on behalf of Secretary Brady; Pedro Aspe was there and John Reed and Lew Preston and a number of bankers were there. I remember shuttling back and forth a fair amount between the bankers and Aspe. We were able to get quite a lot done in the corridors around that meeting.The other thing that comes to mind were the numerous discussions that Brady and Mulford and I had with Salinas's chief of staff at the time, Pepe Cordoba, around the edges of the G-7 meeting in Paris. That was around Bastille Day in 1989 and Secretary Brady went to church along with President Bush that day. I don't make it a habit when I'm travelling of going to church, but I agreed to meet the Secretary after the service. So I went down the street for a coffee and sitting there was Pepe Cordoba, and I went over and had breakfast with him. And subsequently the Secretary met with him and tried to persuade him to take the practical view and go forward with the negotiations.Brady sent out signals to both sides that by the summer they had better start closing deals. It finally happened in a meeting at the Treasury on a long, hot weekend in July. By that time, we had a good rapport with the Mexicans, and the people who had criticized the plan, like Gerry Corrigan, were by then finally on board.
Are there any other episodes that really stand out in your mind?
I remember a particularly difficult meeting with President Menem, when right in from of me he fired his finance minister, which I've always felt somewhat guilty about. I walked out of that meeting feeling really awful. Although I felt that the guy probably needed to be fired, I had partly provoked it because before the meeting I really laid down on behalf of Secretary Brady some pretty hard guidelines that we thought were necessary if Argentina was to have our support and the IMF's support. When the minister hemmed and hawed and started dragging his feet, Menem just turned to him and...well, my Spanish isn't perfect, but it's good enough to understand what he said without a translator.

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