Brady Bonds

Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the late 1980s. The bonds were named after U.S. Treasury Secretary Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.

History

Brady bonds were created in March 1989 in order to convert bank loans to mostly Latin American countries into a variety or "menu" of new bonds after many of those countries defaulted on their debt in the 1980s. At that time, the market for emerging markets' sovereign debt was small and illiquid, and the standardization of emerging-market debt facilitated risk-spreading and trading. In exchange for commercial bank loans, the countries issued new bonds for the principal sum and, in some cases, unpaid interest. Because they were tradable and came with some guarantees, in some cases they were more valuable to the creditors than the original bonds.

The key innovation behind the introduction of Brady Bonds was to allow the commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get the debt off their balance sheets. This reduced the concentration risk to these banks.