Brady’s Lessons

As ever, the 1970s loom large. The economic and political trauma of those years has cast a long shadow over economic policymakers and commentators, and some are wondering whether we are in for a return. There are of course some superficial similarities: then as now, accommodative fiscal and monetary policies preceded a period of elevated inflation. Then as now, inflationary pressures coincided with an energy shock (the 1973 embargo and 2022 invasion of Ukraine) and then another energy shock (the 1979 Iranian Revolution and 2026 Iran War).  Initially, emerging markets enjoyed unprecedented capital inflows—the petrodollar recycling of the 1970s, the sugar rush of low rates in 2021—before facing debt pressures associated with those inflows when advanced economies began raising rates. Across the developing world, what followed the 1970s was “La Década Perdida” of the 1980s—the Lost Decade—which gripped not only Latin America, but large swathes of Africa and East Asia, too. What will follow there today remains something of an open question.

Indebted nations recovered from the Lost Decade with the help of the Brady Plan, a creative and ambitious debt-restructuring program introduced in 1989 by US Treasury Secretary Nicholas Brady. The Brady Plan had come after a decade of half-measures—most notably the “Baker Plan,” named after Brady’s predecessor, James Baker—which merely pushed out the payments schedule of debts, giving countries breathing room but kicking the can down the road. The Brady Plan, by contrast, decisively cut debt stocks, imposed haircuts on creditors, and paved the way for robust recoveries through strong IMF programs. As the IMF economists Neil Shenai and Marijn Bolhuis show in a new book, How the Brady Plan Delivered on Debt Relief, Brady restructurers were able to achieve lower debt levels over the long term while boosting growth and lowering inflation. They outperformed non-Brady peers who either restructured their debt outside of Brady exchanges or did not receive debt treatments. 

Beyond their econometric analysis of the Brady Plan, Shenai and Bolhuis’s second preoccupation is whether some version of the Brady Plan should be revived to address today’s debt problems. Heavy borrowing from international capital markets and China in the 2010s led certain countries’ economies to limp into Covid-19, the monetary tightening following Russia’s invasion of Ukraine, and the inflationary shock of the Iran War. They are struggling to limp out. The myopic slashing of aid spending by advanced economies has now blown holes in certain developing countries’ budgets and is undercutting essential forms of spending, exacerbating vulnerabilities to health shocks, natural disasters, and more. This in turn undermines debt sustainability and long-term growth. As the war in Iran drags on and the closure of the Strait keeps fuel and fertilizer expensive, inflation will continue to bite and interest rates will remain elevated. The pressures on certain poor countries will hold, and debt policy will inevitably move up the international community’s agenda. Calls for a Brady Plan 2.0 will undoubtedly emerge, if they have not already.

The debt problems of the 1980s were more aggravated and systemic than the problems of today, and it would be a misuse of scarce development resources to marshal funds towards a global crisis which does not quite exist. Moreover, the technical structure of the Brady Plan—attractive though it remains—cannot exactly be replicated in today’s interest rate environment. But the need for action in a handful of countries, to respond to a handful of problems, is clear. Policymakers should look carefully to understand which of the lessons of the Brady Plan—the most successful debt initiative of the post-war era—might still apply. 

What will stand out is the need for a sea-change in coordination amongst the multilaterals. The IMF and the world’s multilateral development banks not only need to bring affordable financing to countries that need it, they also need to strong-arm countries to restructure if they have reached the point of insolvency. Doing so will not be comfortable, and accusations of heavy-handedness are likely to run rife. But refusing to allow countries to play multilaterals off each other to keep unsustainable policies going is essential. It may not be the most shining component of the Brady Plan, but the strong steering of the multilaterals was the keystone of the plan’s success—and can bring success, and avert crisis, again today.

From Baker to Brady

Oil exporters’ discontent had been brewing before 1973, and understandably so. Over the prior quarter century, prices had barely budged. A barrel of crude had gone for $2.58 through the late 1940s and ticked up to just $3.56 by the early 1970s. The Arab-Israeli War of October 1973 gave oil exporters an opportunity for a correction. Announcing a total embargo against those that supported Israel—starting with the United States, United Kingdom, Canada, and Japan—oil prices shot up by 300 percent. The war passed after two weeks, but prices remained high through the decade as exporters coordinated to keep supply low. With the Iranian Revolution of 1979, oil got another 180 percent jolt. 

High prices led to immense current account surpluses. Saudi Arabia’s surplus jumped to 51 percent of GDP in 1974, after the first oil shock, and Kuwait’s hit 57 percent in 1979, after the second. With inflation still ripping through the United States and interest rates excessively low, leaving dollars on deposit was not an option. Instead, a glut of “petrodollars” flooded the world in search of yield, transiting through the US and European banking system, through the Eurodollar market that had developed over the prior decade. The banks converted oil revenues into long-term, higher-yielding loans. 

Much of that lending was absorbed by advanced economies themselves, but the loans reached emerging markets, too. The external debt of one hundred developing countries shot up by 150 percent in the first act of the oil shock, from 1973 to 1978. In Latin America, external debt increased by 448 percent. With the second oil shock—the Iranian Revolution in 1979—US banks’ exposure to developing countries grew to as much as 288 percent of their capital by 1982. 

What happened next is well known. In August 1979 Jimmy Carter appointed Paul Volcker as chairman of the Federal Reserve. Volcker ratcheted up the Fed Funds Rate to 17 percent. As it crossed 19 percent in 1981, West German Chancellor Helmut Schmidt lamented that Germany was facing “the highest rates of interest . . . since the birth of Christ.” The Volcker Shock caused the world to slide into recession by 1982. 

Oil exporters managed to keep prices high, in the range of $30 per barrel through the early 1980s, by taking supply off the market. But by this point, high prices only added to the pain for emerging markets. They did not contribute to new petrodollar recycling. US banks’ exposure to developing countries stayed flat after 1982. In August 1982, Mexico announced it was neither able to raise new financing to roll over its loans nor repay them outright. 

In the US, the emerging-market debt crisis was met with a weak response. The US Treasury put forward the “Baker Plan,” which promised to reprofile debts for countries in debt distress by extending maturities, but imposed no haircuts. The plan, which treated a solvency problem as a liquidity problem, failed. The reason for the Treasury’s faulty policy was not hard to decipher: US banks did not want to take losses, and Ronald Reagan’s Treasury was not about to make them. The result was that, within a few years, most “beneficiaries” of the Baker Plan fell back into debt distress. Growth across the developing world stalled or contracted as debtors redirected spending toward debt service. As the crisis dragged on, it became clear that restructurings were needed.

The next Treasury Secretary, Nicholas Brady, launched a different approach. His “Brady Plan” allowed governments in debt distress to restructure their debts by exchanging commercial bank liabilities for newly issued, publicly-traded Brady Bonds. Unlike the prior Baker Plan, Brady exchanges included face value haircuts. Creditors were willing to participate because the plan offered them liquidity and a guarantee. The new “Brady Bonds” replaced illiquid bank loans (the primary source of lending to developing countries at that time) with liquid, tradeable bonds, collateralized with zero-coupon US Treasuries, the purchases of which were financed by the IMF and multilateral development banks. 

The long-term success of the Brady Plan notably extended beyond face value debt reductions, which were often somewhat modest. Brady countries benefited from long-term declines in debt roughly six times greater than the initial haircuts, in what Shenai and Bolhuis term the “Brady multiplier.” This multiplier was driven by a more-than-doubling of the Brady countries’ growth rate during the 1990s, mostly due to productivity gains. The authors attribute these positive outcomes to the ambitious structural reforms that Brady restructurers undertook alongside debt exchanges, anchored by strong performance under IMF programs. Shenai and Bolhuis find that Brady restructurers stood out from their peers by liberalizing trade and foreign investment, and lifting domestic market regulations. The result was more trade, more direct investment from abroad (including the technology transfers that come with it), financial market deepening, and more growth. 

An insufficient stitch-up

The run-up in today’s debt pressures has distinct origins from those of the 1970s. After the 2008 financial crisis and the ensuing decade of chronically weak demand in advanced economies, central banks slashed rates to zero and kept them there for a decade. Large-scale central bank asset purchase programs further lowered long-term yields. A resulting search for yield attracted investors to some of the world’s poorest countries.

Many of these poor countries had entered the new millennium with healthy balance sheets. Their old multilateral and bilateral debts had been forgiven under the Heavily Indebted Poor Countries (HIPC) initiative of the 2000s. HIPC would prove to be a very moral undertaking with very ambiguous effects. With their debt stocks reduced, poor countries simply turned to international capital markets and China to raise new financing. This financing was often much more expensive and much shorter. Yet unlike the World Bank and IMF, private capital and Chinese capital would not come with policy conditions and disbursement reviews. This was attractive until, of course, it was not. 

In Africa alone, Senegal, Ethiopia, and a dozen others issued debt on international capital markets for the first time. Zambia, which tapped international capital markets for the first time in 2012, caused a stir with yields lower than Spain’s. At the same time, China was growing to be the world’s largest bilateral lender. It had grown tired of earning no income on its $1 trillion in US Treasuries. A bilateral search for yield was thus underway as well. The People’s Bank of China gave a small allocation of its foreign-exchange reserves to China Development Bank and others to manage, paving the way for the $1 trillion project that eventually became the Belt & Road Initiative. 

After a decade of commercial and bilateral borrowing, debt vulnerabilities materialized in stages. The “Taper Tantrum” of 2013, when Federal Reserve Chairman Ben Bernanke motioned at scaling back the Fed’s asset purchase program, sent a shockwave through emerging markets. A nearly 40 percent fall in commodity prices between 2014 and 2015, combined with China’s stock market collapse in the same period, sent emerging-market commodity exporters reeling. Growth and foreign-exchange earnings were dented, and debt concerns were building. Still low- and lower-middle income countries continued tapping international capital markets—and China continued lending—from 2015 through 2020.

Then, the sudden stop. In 2020, the Covid-19 pandemic triggered a sharp reversal in capital flows to emerging markets, and lockdowns slashed government revenues while stalling economic growth. Some countries that had accumulated large debts over the prior decade fell into distress. Zambia defaulted in November 2020. Chad and Ethiopia approached their creditors shortly thereafter, requesting relief. 

As with the tepid Baker Plan, the G-20 first rolled out the Debt Service Suspension Initiative (DSSI) in May 2020 to respond to Covid-19. This treated the debt crisis facing low-income countries as a liquidity crisis, just as Baker had. Soon enough, it was clear the DSSI was insufficient. Not only did the DSSI lack creditor participation—only one private creditor joined—it was also hard to escape the fact that some countries faced solvency issues. They needed to restructure.

The international community realized this more quickly than it had in the 1980s, which saw a four-year delay between Baker and Brady. Six months after the creation of the DSSI, the G-20 established a more comprehensive plan called the “Common Framework.” This would bring together all official creditors—the Paris Club (rich-country sovereign lenders), alongside China and other lenders—to negotiate restructurings. A deal between the borrower and this “official creditor committee” would then set a benchmark for a subsequent deal between the borrower and the “private creditor committee,” which is where banks, asset managers, and hedge funds would sit. As with the Brady Plan, the Common Framework took seriously the solvency issues of the day. 

However, the Common Framework fell short. A few obvious problems emerged; most problems, to be fair, were naturally endemic to the difficult experience any country, corporation, or person would endure when borrowing money and announcing the inability to pay it back. But in the Common Framework’s case, the decision to have two separate and sequenced restructuring negotiations (bilateral creditors first, then private creditors after) sowed suspicion and led to protracted negotiations. China, the largest bilateral lender, proved intransigent for both the official and commercial lenders, creating further delays and leaving their borrowers in limbo. When, at last, the Common Framework did deliver restructurings, the debt relief was often not enough and the country was saddled with a peculiar financial instrument that was meant to sweeten the restructuring deal for the creditors.  In the end, four countries signed up: Chad, Zambia, Ghana, and Ethiopia. Sri Lanka’s restructuring occurred outside the Common Framework. 

Chad’s restructuring was an odd and insufficient stitch-up. The essence of its debt problem, the IMF said, was the need to “restructure a large, collateralized obligation held by a private company.” The private company behind Chad’s oil-backed loans was the commodity trading company Glencore. Glencore did not play ball. Talks dragged with little news until, following Russia’s invasion of Ukraine, oil prices surged and the value of Glencore’s collateral rose. This allowed Glencore to exercise a “cash sweep clause” in its loan contracts with Chad—repaying itself using Chad’s higher oil revenues. Alongside this windfall, Glencore offered a short-term reprofiling of Chad’s debts. There was no debt relief. The international community was looking for a success story with the Common Framework, and declared Chad to be one. That beggared belief, and the IMF still considers Chad to be “at high risk of debt distress.” 

Zambia suffered for four long years as its largest creditor, China, fought with its other official and commercial creditors. After bondholders and Zambia finally completed a years-long negotiation to restructure claims, the China-led official creditor committee vetoed the deal. After revisions, it did so again.  The loose ends of Zambia’s restructuring are still being tied today. Zambia just bought back an expensive and convoluted GDP-linked bond that it issued as a sweetener for the bondholders during the restructuring. According to the IMF’s most recent assessment, Zambia remains at high risk of debt distress. 

Ghana’s was the closest thing to a Common Framework success, and the country has enjoyed strong growth since the restructuring, powered by surging gold prices, the country’s largest export. Hopefully, this growth will be durable, but questions remain: of the eleven conditions due for the most recent program review, only four were actually met. 

As for Ethiopia, the case was only recently concluded. The Ethiopian government reached a deal with the official creditor committee in March 2025. It then continued on to strike a deal with its private creditor committee. After it did so, and after the IMF certified the deal, the official creditor committee rejected it on the grounds that the bondholders had not offered as much relief as the official creditors. This violated the principle of “comparability of treatment,” which holds that all creditors should provide debt relief on roughly equal terms. Of course, this principle is not law, and it was the official creditor’s insistence that they strike a deal before the private creditors which had backfired. Outraged, the private creditors announced they would sue Ethiopia for full repayment on a defaulted $1 billion bond. This was a bluff, but a daunting one. With tensions running high, a deal was reached in late June 2026.

It goes without saying that the Common Framework has not lived up to the success of the Brady Plan. When a second shock, and second stop, came in 2022, no new debt initiative was agreed upon. It took two years for poor countries to claw their way back to market access, and the return to Eurobond issuance was painful. Most notably, Kenya inadvisably issued a $1.5 billion, seven-year bond at 10.375 percent.

As the Common Framework fell short, policymakers began to focus their debt efforts again on liquidity issues that simply require new financing and perhaps some reschedulings—not outright restructurings with real haircuts. This liquidity program was first put forward by the Finance for Development Lab, an independent think tank housed within the Paris School for Economics (where one of us, Stephen Paduano, is a senior economist), as the “Bridge Proposal” and then repackaged by the IMF and World Bank as the “Three Pillar Approach.”

Such a liquidity operation may also be a good way to clean up countries’ debt stocks—refinancing and replacing particular creditors that pose policy problems. For example, a debt agenda could term out certain regional multilaterals which load up low-income countries with expensive and sometimes collateralized debt while declaring themselves to be “unrestructurable”—entitled to full repayment even when every other creditor takes losses, a privilege known as “preferred creditor status” reserved for the major multilateral lenders.  One such institution is Afrexim Bank, a regional multilateral that lends at commercial, rather than concessional rates, but which nonetheless demands to be exempt from providing debt relief. The headaches created by Afrexim have highlighted broader problems around preferred creditor status. An initial step to remove bad multilateral actors from debt stocks could be useful. 

Such refinancings may similarly help to term out new total return swaps, a convoluted financing arrangement whereby countries post large amounts of their own domestic debt and other assets as collateral to borrow smaller amounts of dollars from foreign banks. Total return swaps have become small sticks of dynamite in countries’ debt stocks recently, complicating future restructurings. Angola was an early canary in the coal mine, as it was slapped with a $200 million margin call by JP Morgan for its total return swap last year. Terming them out now, and attaching debt transparency and management conditions to the new multilateral financing used to replace them, is one quick and easy way to avoid future blow ups. 

Holdout debtors

Policymakers, or at least those who push them, will always ask what more can be done. For many, simply cleaning up low-income countries’ debt stocks with new multilateral financing will seem insufficient. They are likely to look for something bolder. The problem, however, with resurfacing the Brady Plan is that a necessary condition for its success was the interest rate environment of the late 1980s—which no longer exists today. The steep upward-sloping yield curve of that period meant the zero-coupon Treasuries that collateralized Brady bonds were cheap to purchase, at deep discounts relative to coupon-paying bonds. As rates declined sharply through the 1990s, the floating-rate multilateral loans used to purchase that collateral, as well as the large chunk of Brady bonds that carried floating rates, also became cheaper to service. This essential element of a steeply upward sloping yield curve is not present now. The current interest rate environment and trajectory—a much flatter curve and no expectation of a precipitous drop in interest rates—undercut the Brady structure in more ways than people seem to appreciate. Such a technical mechanism cannot, in all actuality, be replicated today.

If nothing else, looking back to the Brady Plan helps us understand where the problems do and do not exist today. It is clear in retrospect that the utility of the Brady Plan’s guarantee structure and interest-rate differential was to incentivize creditor participation. Creditors got something of a free lunch, and thus went along with the exchanges. 

Today, creditor participation and coordination remains an obstacle, but it is not the principal problem we need to solve. The ability to deliver consensual restructurings has already improved, and there is reason to believe coordination may improve further. The rise of Collective Action Clauses (CACs) after the Eurozone crisis now allows restructurings to go through with majority, rather than consensus, voting by creditors. China remains a thorny creditor, but something of a playbook has emerged for how to restructure its debts: China has been willing to accept very long reprofilings which, when combined with helpful refinancings, can provide net present value reductions that are equivalent to outright restructurings. Kenya’s recent experience with China provides an illustrative example and a model for others. 

So what is the principal problem, if holdout creditors and the need for incentives are not it? Peculiarly, the world is dealing with holdout debtors fearful of restructuring debts: the spectre of acrimonious negotiations with bondholders and intransigent Chinese official creditors, and the loss of short-term access to capital markets that restructurings can cause, discourages addressing the debt problem. The admission of the need to restructure debts, for many finance ministers, is an admission of defeat; they take understandable, if occasionally misplaced, pride in a record of remaining current on debt obligations. To an uncomfortable extent, multilaterals and markets are abetting this behavior.  

This has become clearest in the case of Senegal. In 2024, Senegal discovered $7 billion in hidden debt. The prior government had borrowed profligately—but kept new borrowing off the books, only to be uncovered in an audit by the subsequent government. As a result, the country’s debt-to-GDP ballooned from 80 percent to 130 percent overnight. A debt restructuring has been essential, and incontrovertible, yet the government has been refusing. The prime minister viewed an IMF deal as an assault on Senegal’s economic sovereignty, though avoiding a restructuring would require austerity measures such as downsizing state institutions. (Restructurings, too, may demand some degree of austerity—insofar as the associated IMF program, and participating creditors demand it—but necessarily less severe measures to restore sustainability, given the debt write-down.) In May, he was dismissed by the president, who is more open to negotiating a deal, though none has been forthcoming.

Bolivia has done a rather similar thing. In order to avoid a much-needed debt treatment, Bolivia raised funding from the Inter-American Development Bank, the Latin American Development Bank, and touted negotiations for an IMF program. The multilaterals’ money, and the prospect of more multilateral money from the IMF, allowed Bolivia to temporarily regain the confidence of its creditors and return to the market with a 9.75 percent 5-year bond. This, of course, was not what the country needed. Bolivia fell into a full-blown political crisis triggered in part by austerity measures such as cutting fuel subsidies and reducing public spending. This week, Bolivia reached a provisional agreement with the IMF for a $1.9 billion program. The IMF’s press release called for “expenditure rationalization” and “fiscal consolidation,” but no debt relief—meaning Bolivia’s burden of adjustment will be placed entirely on its citizens, not its creditors who gave it financing it certainly should not have raised.

The Republic of the Congo did much the same thing earlier this year, raising funding from regional multilaterals and touting talks with the IMF. The multilaterals’ money allowed the Republic of the Congo to return to the market. It issued a cartoonishly expensive bond carrying a 13.7 percent coupon. It then abandoned the IMF program, the prospect of a debt treatment, and the reforms the country needs. The country is likely insolvent, and its recent actions have only delayed and exacerbated the eventual restructuring.

This “holdout debtor” problem is facilitated by a breakdown in coordination that usually proceeds as follows: a struggling country will go to the IMF to entertain a program. The interest of regional multilateral banks will be piqued. Bonds will trade up on the news of multilateral money. A narrative about reform and growth will grip the market. The regional multilateral development banks will commit funds. Talks with the IMF will progress and, importantly, be leaked to the press. The bonds will trade up further and, with the new investor appetite, the country will issue a new bond. Then, feeling in the clear with new money from the multilaterals and the markets, the country will abandon the IMF, the reform effort, and the needed debt treatment.

Here is where the Brady Plan offers its most useful lesson for the present. The Brady Plan succeeded not only as a result of its technical design, but also as a result of remarkable coordination between advanced economy governments and the multilateral institutions they steer. People perhaps take this as a given: after all, advanced economy governments are the controlling shareholders of both the multilateral development banks and the IMF. Yet it has become obvious that governments today are not shaping and coordinating the policies of multilaterals in a helpful manner. It is too often the case that a country in negotiations with the IMF will get a partial bailout, and an ability to abandon a reform agenda, from a multilateral development bank—and, with that boost, international capital markets. 

This was inconceivable in Brady’s day, when the US Treasury marshaled multilateral institutions to support restructurings, not undermine them, and where commercial financing was closed as an outside option for most borrowers, as banks (then the only game in town) had stopped lending. The term applied to the IMF—the world’s lender of last resort—meant something in those days. Governments did not have the option to raise a bit of bailout money from a different multilateral development bank, from commercial lenders, or, of course, from one after the other.

Policymakers should ensure that multilaterals band together to prevent countries from playing multilaterals and markets in such a way. Shareholders should make sure that multilaterals hold the line: if an IMF program is predicated on a restructuring, another multilateral development bank should not sweep in to kick the can down the road and enlarge the debt in the process. Shareholders should also instruct multilaterals to improve their strategic communication to keep countries from a self-sabotaging courting of markets: if negotiations with a country are going in circles, they should say so publicly. For their part, of course, the multilaterals still have more work to do. How $7 billion in hidden debt built up under the nose of the IMF, World Bank, and African Development Bank remains an open question that should spark serious internal improvements. How a debt restructuring and IMF program can be portrayed as so politically anathema by one Senegalese politician as to grind the country into austerity should spark some hard work by the Fund on navigating a new world of misinformation and hyper-polarization.

The world does not look as it did in the 1980s. The risks of spillovers into advanced economies—the cudgel to act back then—does not exist. There will not be the same political or economic pressure to come up with a good debt agenda. A wave of poor country defaults would not, admittedly, pose systemic financial risk. The reservoir of geopolitical motivation also appears to be running dry. There is a clear belief, not only in Trump’s America but also in Labour’s Britain and elsewhere, that overseas development assistance does not serve national interest. This, too, would have been an unthinkable proposition in the dying days of the Cold War. 

Most policymakers will simply look the other way. Yet some policymakers, hopefully, will not. They will scrounge for ideas. The lesson to be learned from the Brady Plan that can be applied in 2026 is how to wrangle the relevant actors and marshal the multilateral institutions towards one, cohesive debt agenda.  With the right coordination, multilaterals can all but ensure that indebted countries do not prioritize their short-term interest and external creditors over their long-term welfare and their people. It is not a technical lesson. It is a political one.