Abstract

"Relief or Reduction: Bank Loans, Political Instability, and the Brady Plan, 1987 - 1989"

Nick Cohen, University of California, Santa Barbara (ncohen@ucsb.edu)

In May 1987, Citibank became the first major US commercial bank to set up a loan-loss reserve for the remaining debts of Latin American countries. Nearly five years after the onset of the Latin American debt crisis, Citi’s move toward debt relief marked the beginning of a larger shift in the debt strategy. By the end of the year, Mexico had reached a deal with Morgan Guaranty to offer to exchange $20 billion of outstanding loans for negotiable bonds. Three years later, this securities-based approach to resolving the debt crisis would be formalized with government backing in the US Treasury’s “Brady Plan” and issuance of “Brady Bonds.” This paper investigates why direct debt reduction was only offered to debtor governments after a near decade of declining economic growth. The paper argues that debt policy taken in the “public interest” of debtors was only palatable to western policymakers after financial stability had been ensured and banks were given adequate time to rebuild their balance sheets. With bank health ensured, officials at the Treasury, IMF, and World Bank started to take seriously the threat to democracy in Latin America posed by the stringent austerity that previous loans and aid packages had required. At that point, debtor governments in Latin America had been so thoroughly reshaped around market-oriented reforms, that ensuring the stability of those governments became important. Utilizing archival records from the IMF and World Bank, as well as the papers of key Treasury officials, this paper investigates the intersections of business and public interests. By recreating the debates around new debt strategies, the paper highlights how policymakers balanced the demands of US commercial banks with foreign policy interests. Looking to the bank-centered strategies of the early years of the crisis, this paper demonstrates how business interests can supersede that of the public.