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In their own words. (Nicholas Brady)

Jul 1, 1998

Nicholas Brady, Darby Overseas Investments
More than any other, Nicholas Brady's name is synonymous with the transformation which Latin America has undergone in the last 10 years. The debt relief and rescheduling agreements which bear his name created a huge, liquid market in sovereign Latin debt which paved the way for the region's reentry into the international capital markets. As US Treasury Secretary from 1988 to 1993, he not only designed the strategy to solve what was a $1.3 trillion crisis in LDC debt, but also helped resolve the US savings and loan industry crisis. After leaving the Treasury, he formed Darby Overseas Investments, channeling private equity money into the region.
What were the catalysts for finding market solutions to Latin America's debt problems?
We didn't start out with a plan to revitalize Latin America, although that was enormously important to President Bush and to the people in the administration. The reason we started on Latin American debt and the savings and loans-the Bush administration worked on both at the same time-was that with a banking system that was sick, and it was plenty sick, you could not have growth and vitality in the US. The S&L bailout cost this country $150 billion-plus. The Brady Plan really did not cost the US anything, but it took an enormous load of bad debt off the balance sheets of the banks. So, it started as part of a plan to revitalize the US economy, because you can't have a revitalized economy if the banking system is in contraction.People have forgotten that the first real step in the recovery of Latin America was the return of flight capital-the first "swallow" coming back. Once flight capital saw the opportunity in each individual country, it came back because it could buy discounted debt and that discounted debt could be turned into equity swaps. So, the whole process actually started with the return of flight capital. That idea came about in talking with Lew Preston, who was then head of JP Morgan and, later, the World Bank. He said that JP Morgan had made a successful business of selling discounted Latin America sovereign debt to people who had expatriated money. I said to myself, "If that is true, if we can do that on a grand scale then people would see it and say, 'Well, the thing I know best in the world is my own country and if I can buy into my own country at 50 cents on the dollar...that's what I'll do,' and others would follow." So that's how you had this huge flow of funds coming back into Latin America.
How could you guarantee that Latin American countries wouldn't return to their old practices once their debt was reduced? Or did they simply see that previous economic policies didn't work?
The people running Latin American countries at that point, particularly at the finance ministries, weren't generals and colonels coming out of the military organizations in their respective countries. They were people who had gone to all the best universities in the US and had studied carefully what was for them a new way of thinking about how governments should organize themselves. At the same time, the crumbling of Soviet Union and the Eastern Bloc proved that model of governing did not work. So, first of all, the people who headed Latin American governments saw both that state socialism did not work and that there was an alternative, which I call democratic capitalism-in other words, free-market policies that get governments out of the people's business. Secondly, as the Brady bond resolutions were negotiated for each country, the leaders had to sign onto the reforms being predicated by IMF, the World Bank and the US Treasury. If they did not sign on to reforms that were necessary in order to make sure from the beginning that their "ship" was on the right course, they couldn't be part of a Brady Plan resolution of their debt problem.
Who were the key people involved in devising the Brady Plan and how was it put together?
It started in the fall of 1988, actually while George Bush was running for president. Since I was not on the campaign trail I had time to think about the debt problem, and I decided we were thinking about it in the wrong way. While it may have been useful to try and force commercial banks to lend increasing amounts of money, it was clear this was not going to provide a long term solution to the problem. Once their own balance sheets were improving, they could just say: "We are willing to take the losses and we are not going to put up any more money."The rethinking of the problem all started in the US Treasury department-with two key people, David Mulford and Charles Dallara. For the better part of a month, we turned the problem on its head. With the commercial banks receeding, how do you get others to invest the money needed for a country to grow? How else could you get the financing? The region was facing a financing gap of billions of dollars at the time.George Shultz was then still Secretary of State and I spent a lot of time talking it over with him, because I found him to be one of the keenest minds you could find, a very clear thinker. We ran the plan by him and he thought it would work. And then we went to the Federal Reserve and called Gerry Corrigan...and by then we had a plan that was ready to roll.Some people began to ask, "What about this?" and "What about that?" We were in the early part of 1989, after President Bush had come into office. "How do you assume that this is going to work?" and "How is that going to work?" I said to David and Charles, "With people asking us so many questions like we're Wilbur and Orville Wright-you know, `Will it fly?' kind of questions-if we don't get moving soon we'll never have a chance." So I said, "Let's find someplace where I can get up and make a speech and launch the plan." So, we found that the Bretton Woods organization wanted a speaker in the spring of 1989, and I said to David and Charles, "Let's go there and I'll give a speech to launch it." So we did, and it was under way. It was imperfect in detail, but we had the backing of President Bush. I can't tell you how many people came out and said at the time that it wouldn't work.
How did the Latin Americans react to the deal? Were they eager or reticent to sign on?
Mexico was the turning point, there isn't any question about it. The way they cured the financing deficit previously was simply to add more debt. So in order to convince the Mexicans that the old system was wearing thin, we tried in the late fall of 1988 to suggest a solution under the old system. But it didn't make any sense, so they went back to Mexico...and we really went to work.The Mexicans came back in 1989 to try and start working out the details under a new plan. There were extensive discussions with Pedro Aspe and Angel Gurria about how we might make it work, and what commitment they would have to make and how much money would be involved and where it could come. We enlisted the help of the World Bank and the IMF to provide a cushion of funds to get the job done. The solution included backing up the existing discounted debt with US Treasury zero coupon bonds, which the debtor country would have to buy with money lent to them by the IMF or the World Bank. Sometimes they had some reserves of their own to buy it. I think everyone who worked on this, both on the US side and the constituent country side, probably wasn't completely sure it would work. But it was the best idea we had and our best hope at that particular point in time. We took the plan to the G-7 summit and although there were some questions about it, the G-7 backed the idea and the Japanese were helpful and put some money behind the process.At one point, we were having a really hard time getting the Mexicans to let go. They wanted to get one more of this and one more of that...always one more concession. So we were in Paris for the G-7 economic summit in 1989 and Salinas was in Europe at the time meeting with a bunch of bankers. The bankers in my view had come to a point were they probably had given in as much as they could in the negotiations. But the Mexicans would not finally say, "Yes." So two days before the economic summit, we met with Pepe Cordoba, who was the chief of staff for Salinas. We met outside the American church in Paris where President Bush was attending a service. He and Charles Dallara and I were leaning on some parked cars and were talking, and I told them a story about wheelbarrows.It's a story about a Russian factory where this guy would leave work everyday with a wheelbarrow. The first day, the guards look inside the wheelbarrow and see nothing, so they let him pass. The next day, they check the handles and find nothing, so they send him through. The third day, they start getting suspicious and check the wheels and nothing. And finally they stop him and they say, "Okay, we know you're stealing something...what is it?" And the guy looks at them and says, "Wheelbarrows."Well, I am not sure Charles thought the story was great, and Pepe Cordoba's eyes were rolling around in his head, like he's thinking, "What is the point of this story?" And the point is, "You have the chance to get this enormous pile of money that will be coming to your country and here you are worrying about little details. The point is that you can steal the wheelbarrow." I think it made an impression, because a day later Salinas said "Yes," and it was announced at the press conference at the end of the Paris economic summit.
How did the negotiation process between the banks and the countries evolve and what was Treasury's role in that?
Well, after we launched it at the Bretton Woods luncheon, it sat our there for 10 days to two weeks and most people said it wouldn't work. A few said it would. Then there were debt groups and committees which were formed by the commercial banks to deal with the particular problems of Mexico, Brazil, Argentina or whatever country. They would get together and try to flesh out the details: how much discount there was to be, the guarantees, collateral, interest payments, etc. They would work for a while and then get to an impasse. The Treasury Department's job was to bring both parties together, not necessarily in the same meeting. But to talk to the banks one day and the government the next. The idea was to keep it moving, keep it going; to keep repeating the argument, "Is it better to quit and let this thing tumble down?"The basic premise was there and people began to understand that the amount of money that would come into the region would increase, because the world would make investments in the region. Then things began to look better and they began to say, "Well, maybe I will go along with it." There was a lot of hard work. And while I don't want in any sense to downplay the work the commercial bankers did-because they did a first class job of making the plan go together in terms of the details-Pedro Aspe and Angel Gurria were indispensable in my book.

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