Brady bonds
Bonds created from 1989 onward to convert defaulted bank loans to developing countries into tradable securities with debt reduction, their principal backed by US Treasury securities.
The debt crisis of the 1980s left large international banks holding loans to Latin American countries that no rescheduling could make repayable. The plan announced in March 1989 by Treasury Secretary Nicholas Brady conceded what successive reschedulings had refused to: part of the debt had to be written off. Banks swapped their loans for bonds, either at a reduced face value or at full value with a reduced rate, whose principal was backed by zero coupon US Treasury bonds bought by the debtor country with help from the IMF and the World Bank. These standardized, tradable securities created the emerging market bond market. They also turned sovereign risk into a market risk, priced every day.
The crisis had begun in August 1982, when Mexico announced it could no longer service its debt. Mexico was the first country to reach a Brady agreement, in 1989 and 1990, covering about 48 billion dollars of bank debt; some fifteen countries, including Argentina, Brazil and Nigeria, followed in the 1990s.
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