Mexico and the Brady Plan

Abstract

Mexico has throughout the 1980s been centre-stage in the debates and events shaping the sovereign debt problem. Caught between a sudden collapse of its terms of trade and rising world interest rates, Mexico suspended debt-service payments in August 1982 and ushered in what has since become known as the debt crisis. In the following years, lending to LDCs dried up and debtor countries were increasingly forced to run high trade surpluses to effect ever-growing transfers from poor back to rich countries. In the face of falling growth rates and rising inflation in the high-debt countries; then Secretary of the Treasury Baker proposed the 'Baker plan': in return for economic reforms, high-debt countries would get new access to medium-term new loans, in addition to rolling over of amortization of old loans. New loans had to come both from commercial creditors and the official lending institutions. With access to capital markets restored, the economic reforms would, it was hoped, allow the debtors to grow out of debt. But experience in the high-debt countries showed that the original hopes of the proponents of the Baker plan went unfulfilled. Net transfers out of the borrowing countries went up rather than down; as