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Brady Bonds

For young adults, Brady bonds offer little investment value. They do, however, deserve a paragraph, for their educational value in resolving the emerging markets’, primarily Latin America’s, debt crises in the 1980’s. 

As background: The major money center banks lent huge amounts of money to emerging market countries, particularly in Latin America. The credit was based on the theory that these countries could just raise taxes to repay their debt. When they defaulted on their debt (thus proving that the lending practices were flawed to begin with), treasury secretary Nicholas Brady in 1989 used the concept of securitizing assets and successfully restructured the loans to these countries. This allowed the banks to gracefully exit these credits and helped the emerging market countries to be more fiscally responsible in the future.

The Brady plan called for the banks to write off approximately 35% of their loans in exchange for coupon-bearing U.S. dollar-denominated bonds, collateralized by U.S. treasury zero-coupon bonds. Brady bonds had a variety of rate options (fixed, variable, etc.) and maturities ranged from 10 to 30 years. Most of the bonds have been paid back.

The plan was extremely successful, President Bush Sr. and Mr. Brady deserve the credit.


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