By Richard Milne and Stefan Wagstyl in London
The Brady plan that rescued Latin American countries in the 1990s from their debt crisis cannot be applied to the eurozone, according to the architect of the programme.
Nicholas Brady, a former US Treasury secretary, told the Financial Times that eurozone countries such as Greece and Portugal lacked the economic growth needed for such a plan and none of the solutions proposed so far involved real debt reduction.
A European version of the Brady plan has been suggested as a means of ending the eurozone sovereign debt crisis by figures including US economist Barry Eichengreen and Kenneth Rogoff, a former IMF chief economist.
The Brady plan was launched seven years after the Latin American crisis erupted in 1982 and involved investors suffering losses on bonds from countries such as Brazil, Mexico and Uruguay. New so-called Brady Bonds were issued, backed by US Treasury bonds that paid no interest.
Something similar has been proposed by banks over Greek bonds. New Greek debt would be collateralised by a zero-coupon bond from a European institution. If Athens defaulted on the debt, investors would miss out on the coupon or interest payments.
Mr Brady said: ?When we did the Brady plan starting in 1990, Latin America was growing. Greece and Portugal aren?t growing.?
Instead, Greece is slipping deeper into recession, with output down 12 per cent so far, while growth overall in the eurozone is close to becoming negative, according to recent economic data.
Germany is adamant that fiscal austerity is the answer to woes in the eurozone and is urging peripheral countries, including Italy and Spain, to cut budgets and raise taxes. Mr Brady said: ?I don?t think austerity is the answer. What they should be thinking about is growth.?
The 81-year-old – on a trip to London as part of fund-raising efforts for Darby, a private equity firm he founded and still chairs – also argued the Latin American solution was about reducing debt while proposals for Greece?s second bail-out would still see its debt-to-GDP ratio remain as one of the world?s highest.
He said: ?What they should look for is dealing with solvency. Are we talking about just making markets happy for a while??
? The Financial Times Limited 2011