I had earlier quipped that a Brady Bonds type situation might have helped Greece. My statement revealed how little I understood about Brady Bonds. In fact, I realized after reading Partnoy’s Fiasco that they are not bonds at all - but derivatives. As Partnoy writes:
In the late 1980s U.S. Treasury Secretary Nicholas Brady authored a plan to mix this crap [third world denominated debt] together with valuable U.S. bonds and create a more attractive paté of restructured Third World debt that, it was hoped, someone would buy.
As noted by Partnoy, this was marketed as emerging markets debt and provided the inspiration and foundation for other derivatives which converted foreign denominated debt (either public or private) into U.S. dollar paying “bonds”. The amount of U.S. securities thrown into the structure provided the basis for a AAA rating from the agencies. These derivatives were then sold as “bonds” and allowed pension and insurance funds that were barred from making foreign currency bets to actually make such bets (whether willingly or unwillingly). Everyone was happy as long as these bonds didn’t “explode” and returned the high yields that were promised.
This sample chapter from a credit derivatives book states that Brady bonds are de facto a credit default swap with the US government as the CDS seller.