Charles H. Dallara, Institute for International
Finance
From 1988 to 1991, Charles Dallara served as US assistant Treasury
secretary-first, for policy development and later for international
affairs-and was a key player in the Treasury team that put together
the debt reduction strategy known as the Brady Plan. Dallara left
the Treasury in 1991 and spent two years at JP Morgan. Since July
1993, he has been managing director of the Institute for
International Finance.

In your view, why was the Brady Plan so timely?
Well, those of us involved in the debt strategy at the Treasury in
1987 and 1988 saw the Baker debt strategy was on its last legs, for
really two reasons: first, the adjustment fatigue was becoming
heavy even among the better-managed economies, especially Mexico;
and second, the banks were becoming less and less cooperative. Even
when they got a good IMF program to support them they were being
very niggardly on the money and very difficult on the rescheduling
part. Neither side clearly saw it as easy to continue to work
together within the old framework, so there was at the Treasury a
growing recognition that something had to change.In 1988, at the
G-7 summit in Toronto, the Japanese put the so-called Miyazawa Plan
on the table, which sparked some intense debate in the Treasury as
to whether or not we should contemplate some approach involving
debt reduction. At the time, Secretary Baker was not ready to look
down that road. So we did what we could to keep the Baker strategy
alive. But clearly it was fragmented, and we felt that we probably
would not be able to indefinitely hold off one of the major
countries going into default.

So what happened when Brady took over from Baker?
In the fall of 1988, we went through another sharp downturn in oil
prices and it hit the banks really hard again. At the time, we had
begun to engage in yet another round of discussions when Pedro Aspe
came to the Treasury asking for our support-he did not want to have
another IMF program. And that’s when Brady arrived at the Treasury
and that marked a real turning point.In early September, when David
Mulford and I and other staff were personally briefing Brady on
what was then the Treasury’s debt strategy, he knew virtually
nothing about it. And he listened to our views-we were preparing
him to go to Berlin for his first G-7 meeting-a big event and there
was a lot of pressure. And after the briefing he didn’t say much,
and then later that day I remember him wandering down the hallway
to my office: “Dallara,” he said, “this debt strategy is a train
wreck waiting to happen. You don’t really believe this is going to
work, do you?” And I said, “Well, we’ve been looking for the
opportunity to make a shift here for a period of time.” And we were
ready to do it-David Mulford and I had done a lot of thinking on
it, though David deserves the credit for spearheading it internally
at Treasury. And he said, “Well, go to it.” And so that fall we
began an extensive effort to develop a new approach based on debt
reduction.

This must have come just after Salinas was elected in
Mexico?
Yes. And Aspe came a number of times during that period of October
and November and we could say very little, if anything, to anyone
about the work going on at the Treasury Department. I remember
having these surreal conversations with Angel Gurria, who was a key
player in the Mexican Treasury at the time, because they were also
looking at debt reduction scenarios and default scenarios. We
wanted to let them know that we understood a change probably had to
take place, but that we were not in a position to put it on the
table yet, because we hadn’t talked to the White House and they
would face problems with the G-7 if it got out. So there was a
delicate period when the Mexicans were toying around with some
fairly plausible ideas, and we were as well. But we were unable to
sit down and communicate with them about it.

How did you get the plan past opposition in Congress and the
banks?
A lot of the success had to do with Brady’s sense of the need for a
new direction, his willingness to give us some flexibility and
leeway in shaping the proposal, and then his willingness to push it
through. He really showed some extraordinary leadership in getting
it through some very difficult meetings at the White House. I
remember some very difficult discussions there with people who felt
very strongly about the potential political fallout, you know,
“bailing out the banks” kind of talk.Even those of us who knew it
wasn’t really a bank bailout knew it would be perceived as one.
There was also a concern that we were putting the country through
another deflate and devalue scenario. Some in the Republican party
considered any movement of the exchange rate to be anathema, among
them (Bush’s chief of staff) John Sununu, although he came around
later.But there were some sensitive discussions at the White House
in the fall of 1988 and early 1989. Even the night before Secretary
Brady gave his March 10 speech at the State Department to launch
the strategy, we still had people in the US government who were
pulling at it, clawing at it, trying to pull it apart, trying to
modify it. But he remained steadfast. Mind you, when this was
launched it was by no means broadly supported. I remember getting
in the elevator at the State Department the day Secretary Brady
announced it in his speech. Paul Volcker was in the elevator, and
grumbled to me something like, “I hope you understand what this
will do to the US economy.” He was not at all supportive of it.

So the Brady team was pretty much out there on its
own?
Other than a small band of warriors at the Treasury Department and,
of course, the debtor countries. There were not many in either the
US government, the G-7 or the banking community who really felt
that what was needed was a new beginning. We were told that this
was the end of the financial system as we know it; that we were
sanctioning non-payment, we were sanctioning default, we were
sanctioning “deadbeat” behavior. We had some tense discussions at
the Treasury Department at the time of the spring meeting of the
World Bank. We invited some US bankers down to the Treasury for a
luncheon meeting and it was venomous. Venomous is the only word to
describe it.

Are there any memorable moments or turning points in those
first Brady negotiations between the banks and the
Mexicans?
There were two: first, there was an IFC meeting in Madrid in the
spring of 1989 and that was a critical environment for advancing
the negotiations. I was there on behalf of Secretary Brady; Pedro
Aspe was there and John Reed and Lew Preston and a number of
bankers were there. I remember shuttling back and forth a fair
amount between the bankers and Aspe. We were able to get quite a
lot done in the corridors around that meeting.The other thing that
comes to mind were the numerous discussions that Brady and Mulford
and I had with Salinas’s chief of staff at the time, Pepe Cordoba,
around the edges of the G-7 meeting in Paris. That was around
Bastille Day in 1989 and Secretary Brady went to church along with
President Bush that day. I don’t make it a habit when I’m
travelling of going to church, but I agreed to meet the Secretary
after the service. So I went down the street for a coffee and
sitting there was Pepe Cordoba, and I went over and had breakfast
with him. And subsequently the Secretary met with him and tried to
persuade him to take the practical view and go forward with the
negotiations.Brady sent out signals to both sides that by the
summer they had better start closing deals. It finally happened in
a meeting at the Treasury on a long, hot weekend in July. By that
time, we had a good rapport with the Mexicans, and the people who
had criticized the plan, like Gerry Corrigan, were by then finally
on board.

Are there any other episodes that really stand out in your
mind?
I remember a particularly difficult meeting with President Menem,
when right in from of me he fired his finance minister, which I’ve
always felt somewhat guilty about. I walked out of that meeting
feeling really awful. Although I felt that the guy probably needed
to be fired, I had partly provoked it because before the meeting I
really laid down on behalf of Secretary Brady some pretty hard
guidelines that we thought were necessary if Argentina was to have
our support and the IMF’s support. When the minister hemmed and
hawed and started dragging his feet, Menem just turned to him
and…well, my Spanish isn’t perfect, but it’s good enough to
understand what he said without a translator.