The Brady solution to the Euro-crisis

It was a busy weekend for euro-crisis observers. Mario Draghi, an Italian member of the European Central Bank, was finally appointed as its new President; Mervyn King, Governor of the Bank of England, acknowledged that the European sovereign debt crisis is a ‘material threat’ to British banks; David Cameron announced that Sir Jon Cunliffe, a Treasury civil servant, will be the UK’s next ambassador to the EU; and, according to reports, French banks have laid plans for a ‘Brady bonds’-style solution to Greece’s troubles.

In the short run, the last of these will be the most important. Named after US Treasury Secretary Nicholas Brady, the innovative Brady Bonds programme helped solve the 1980s Latin American debt crisis. Under the programme, private creditors voluntarily swapped their loans for bonds, thereby lightening the debtor countries’ repayment burden. To incentivise this swap, the debtor countries provided ‘enhancements’ to the new bonds, usually Treasury bonds that were purchased and held in escrow for release in case of default, a financial hostage of sorts.