Series 65: Brady Bonds

Brady Bonds

When a debtor can’t pay, the result is often bankruptcy. When the debtor is a country and the creditors are banks, then a default can have global repercussions. In the late 1980s, Treasury Secretary Nicholas Brady offered a fix to Latin American countries with overwhelming commercial bank debt: introduce monetary reforms, and in return, the indebted countries were allowed to convert their outstanding debt to U.S. banks into new sovereign debt securities. Thus, a Brady bond is a sovereign debt security issued in U.S. dollars by Latin American and other developing countries. Over the next decade, billions of dollars of so-called Brady bonds were issued by dozens of countries around the world, including Mexico, Argentina, Brazil, Ecuador, Jordan, Nigeria, and Poland.

Brady bonds are attractive to investors, because investors can invest in emerging market debt with improved liquidity and transparency. Principal and sometimes interest was collateralized with U.S. Treasury bonds held in escrow by the U.S. Federal Reserve, thus offering some investment guarantee. Because Bradies are denominated in U.S. dollars, they allow investors to invest in sovereign debt without currency r