Secondary Market Prices and Mexico's Brady Deal

Abstract

The use of official funds in debt reduction packages has been widely argued to amount to a creditor bailout. We analyze this question using a case study of Mexico's 1989 Brady deal. Using an option-based pricing model, we obtain pre- and postmarket values for Mexico's commercial debt and find that the market value inclusive of official funds went up only marginally. Consequently, Mexico obtained a large share of the benefits of the official funds and struck a favorable deal. The Brady debt reduction formula thus seems to offer an efficient framework for debt workouts. Recent events in Mexico confirm that view.