The IMF 30 Years After Brady

IMF Blog, April 11, 2019

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Last month marked the 30th anniversary of the announcement of the “Brady plan”.
The Brady plan allowed countries to exchange commercial bank loans for bonds backed by US Treasuries.
Banks agreed to provide debt relief with the average write down being 35 percent.
The IMF:
- oversaw countries’ adjustment plans,
- provided financing to buy back debt and secure payments on swapped bonds,
- provided a forum for creditor-debtor negotiations,
- incentivized better creditor coordination through policy change (notably the 1989 “lending-into-arrears” policy allowing lending to a country in arrears on private creditor financing if the debtor negotiated in good faith).

Challenge: sovereign bonds are held by a diverse set of creditors, increasing the risk that individual bondholders can “hold out” and free-ride on others’ relief.
Policy responses:
- The IMF initially considered a statutory sovereign bankruptcy regime (the “SDRM”) but supported a market-based approach in 2003 by endorsing collective action clauses (CACs).
- CACs allow a qualified majority of bondholders to agree restructuring terms that bind all bondholders within the same series.
- In 2014, the IMF endorsed the key features of “enhanced CACs” that allow a qualified majority across all bonds to bind the minority; these are now the market standard.

Key statistic: debt levels now account for 225 percent of global GDP.
Risk: difficulties rolling over maturing debt can trigger sovereign debt crises, at which point the IMF often provides financing—raising moral hazard concerns.
IMF policy evolution:
- Early 2000s: recognized circumstances where private sector should contribute to financing adjustment programs and required a “high probability” that debt be sustainable when large financing was required, or else a sufficiently deep restructuring.
- 2010: introduced a “systemic exemption” allowing lending when debt was sustainable but not with high probability and systemic spillovers were likely (introduced during the euro area crisis).
- 2012: Greek experience made private debt restructuring unavoidable.
- 2016: IMF modified its lending framework to remove the systemic exemption and introduce more flexibility to help maintain private creditor financing when debt is sustainable but not with high probability.
Ongoing work: IMF is reviewing its analytical framework of debt sustainability analysis for market access countries to strengthen assessments of future repayment capacity and refine when and on what terms restructurings are necessary.

Trend: an increasing share of official sector financing is provided by “non-traditional” emerging market creditors.
Policy change: 2015 amendment to IMF’s policy on official arrears removed the direct link to the Paris Club where that group’s participation does not represent the majority of official sector financing.
The amended policy allows the IMF to lend into arrears to the official sector if certain conditions (including good faith negotiations by the debtor) are met.

Concern: terms and conditions of sovereign borrowing (including collateral and collateral-like arrangements) are increasingly hidden; new forms of financing such as bond purchases by sovereign wealth funds complicate visibility.
IMF action: working to encourage improved sovereign debt management practices and data reporting by its membership; reviewing its debt limits policy, including guidelines for collateralized debt.

It is impossible to predict the specific new challenges in sovereign debt during the second 30-year period after the Brady plan.
Expectation: the principle of a coordinated international response, exemplified by the Brady plan, will remain indispensable for preventing and resolving sovereign debt crises.
The IMF will continue to play a central role given its unique financing mandate and will adapt to new realities, building on lessons learned from the past.

Rhoda Weeks-Brown, Martin Mühleisen. April 11, 2019 — The IMF 30 Years After Brady