Brady Bonds: An Exit for Greece?

By Stephen Fidler

The two people quoted in the Brussels Beat column today are not the only ones thinking of the Brady Plan, vintage late-1980s, as a way out of the Greek debt mess.  Over in New York, the Center for Financial Stability has produced an interesting paper about why it believes now would be a good time to invoke it in the Greek case.
Here are its main points:

• A solution to the Greek debt dilemma exists. 
• The Economic Subcommittee (ESC) to Bank Advisory Committees during the Brady Debt restructuring era provides a blueprint for identifying common ground, deepening communication, and paving the way for the benefit of creditors and debtors alike. 
• Greece must reverse an economic slide – already in its third year.
• Greece is now ripe for a “Brady” moment.
• A Vienna Initiative approach will likely prove woefully insufficient, as the relief falls short of providing what is needed and incentives differ between Greece’s creditors and those participating in the Vienna Initiative.
•  History shows how debt reduction coupled with significant reform can spark growth.  Brady Plan recipients all demonstrated superior growth in the five years after plan implementation – with the exception of Ecuador.
• Preliminary calculations based on limited publicly available data suggest that Greece could achieve 2% to 3% growth on an annual basis with a 20% to 40% reduction of debt, principal payment re-profiling, and a meaningful reform effort.  The European banking system would likely experience a manageable loss of €23.2 to €46.4 billion.
• Today, the Greek situation is vastly more complex.  Yet, principles from the ESC provide a framework for an honest assessment of the present situation as well as a potential pathway for resolution to the Greek debt dilemma.