From Mexico, Some Lessons for Europe by Eduardo Porter

In 1990, the deal was concluded by the Mexican government of President Carlos Salinas de Gortari. Strong-armed by the Treasury Department and the monetary fund, banks swapped old Mexican debt for Brady bonds backed by United States Treasuries that offered a reduction in principal, below-market interest rates or new money. Mexico’s economy expanded by 4 percent, the strongest growth since 1981. The Brady plan became the template for debt reduction across Latin America and beyond. 

What can Europe learn from this experience? Proponents of austerity will probably note that the harsh years planted some of the seeds of Mexico’s recovery. Bankers will remark that Mexico’s absolute debt reduction package was small — much less than the 50 percent or so already granted to Greece. Economists will note that Mexico had a degree of freedom that no member of the euro area has: it could devalue its currency to gain export competitiveness. 

Nonetheless, the Brady plan was a crucial ingredient. It not only reduced Mexico’s interest costs, it also produced a jolt of confidence that pushed down domestic interest rates and buoyed the peso — reducing the burden of foreign debt. It prompted flight capital to return to the country and set off an investment boom. 

Yet perhaps the most important lesson to be had about the dynamics of economic crises and relief is about what it takes to motivate the political will to act. 

To some extent, we owe the Brady plan to the cold war. Political unrest simmered across Latin America. In 1988, Mexican voters almost ousted the party that had ruled the country since 1929. The region, Washington feared, risked falling into Soviet clutches. Arizona’s governor, Bruce Babbitt, even called Mexico “the ultimate domino.” 

Lt. Col. John C. Mangels, studying at the Air War College in 1988, caught the flavor of thinking at the time. “A financially devastated and chaotic Mexico would strongly interfere with our ability to maintain an East-West balance,” he wrote. “The long-term security threat from Mexico thus hinges on economics.”

So maybe Graeber is right and DeLong* with his red baiting is wrong. It is largely about debt and control.