Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

331. Memorandum From the Assistant Secretary of State for Inter-American Affairs (Holland) to the Deputy Director of the Office of South American Affairs (Belton)¹

Washington, June 7, 1956.

I have reviewed Mr. Bernbaum’s memorandum attached on the proposal to refund the Export-Import Bank loans to Brazil.² I think that the best course is to raise this problem to the Secretary’s level immediately. Accordingly, I would be grateful if you would have prepared urgently a memorandum along the following lines, making any improvements that the staff feels are desirable:

Problem: Whether or not to refund the Export-Import bank loans, stating their amount.

Discussion: The Russians are engaged in an astute and aggressive campaign to expand diplomatic and commercial relations in Latin America.

The prime targets of the campaign are Argentina and Brazil. The principal weapon is Russia’s willingness to supply petroleum equipment to the national monopolies contrasted with U.S. unwillingness to do so.

Our relations with Brazil and Argentina are stronger than they have been in many years. Their present strength is such that we believe each nation will refuse Russian overtures. If both nations remain firm the Russian campaign will fail throughout the hemisphere. If either nation weakens and moves into a close economic relation with the Soviets, then our position throughout Latin America will be calamitously impaired.

Both Argentina and Brazil are approaching us for economic assistance. Judged on purely banking and economic considerations we would be justified in declining to extend that assistance. The sure and certain result would be acceptance of Soviet aid with the implications indicated.

The remedy clearly required is the extension of that amount of Export-Import Bank credit that in our best judgment represents the minimum necessary to keep these two countries sturdy in their new close relations with the United States.

Brazil began by a fantastic request to the United States made at the inauguration ceremonies and contemplating $1,200,000,000. She has voluntarily shown the good sense to scale this down to a request for refunding of existing Export-Import Bank loans. The Bank has indicated that it intends to refuse the refunding proposal. The Bank prefers that Brazil meet its present contract obligations. As for new loans, the Bank would agree that their initial payments could be postponed until the burden of existing annual obligations tapers off.

From an economic and banking point of view this is an entirely reasonable decision. Its effect, in my judgment, will be to drive Brazil into a relationship with Russia that will have the effect on our interests in Latin America which I have indicated above.

Granting of the Brazilian proposal to refund the existing debt will cost the United States nothing. In fact, it will amount to an extension to Brazil of the 14-year payment term which we have already accorded to Argentina rather than the 7-year payment term now exacted of her.³

The hundreds of millions of dollars of grant-aid that we are giving away in other areas of the world are unjustifiable on fiscal and banking grounds, but they are essential to the security of the United States. The same situation, the difference being only one of degree, exists in Brazil and Argentina.

Recommendation: That at the earliest possible moment the Secretary allow me to confer with him and Mr. Prochnow on this matter in order that a Department position can be established.⁴

1. Source: Department of State, Central Files, 832.10/6–756. Secret.

2. In this memorandum, June 5, Bernbaum proposed a position for the Department to take regarding Brazil’s request for refunding outstanding balances on both its $300 million loan and $75 million credit from the Export-Import Bank. After presenting his analysis of the problem, Bernbaum pointed out that the Export-Import Bank was planning to call a meeting soon to permit a discussion and presentation of the Department’s views before reaching a definite decision. He concluded the memorandum with the recommendation that those Department officers attending the upcoming meeting be authorized to urge the Bank to give favorable consideration to Brazil’s refunding application for the following reasons:

   • “1) The burden of debt servicing during the period ending in 1960 is so great as to justify the belief that the Brazilians would not, in any event, be able to meet their full obligations to the Eximbank. It would be better to be graceful about it.
   • “2) Refunding would at the best permit Brazil only to maintain the low level of imports from the U.S. in 1955—judging by the Brazilian presentation and record of performance, capital goods for maintenance and raw materials would be affected far more than consumers goods.
   • “3) The necessity for further curtailment in the absence of refunding would jeopardize the Brazilian economy and Kubitschek’s program of economic development. Eximbank loans for specific projects would be important but would not fill this gap.
   • “4) Although the importance of the Eximbank’s readiness to extend loans on a deferred payment basis would presumably not be lost on the Brazilian Government, its reaction to a refunding refusal might, in light of the foregoing, be expected to arouse resentment and a consequent cooling off in the cordial relations thus far developed with the Kubitschek administration.
   • “5) This might, in turn, represent a gain for the Soviet economic offensive through strengthening the argument of those in Brazil advocating closer trade and diplomatic relations with the Soviet bloc.

   • “6) On balance, therefore, the risks involved do not appear to justify the limited and perhaps questionable gains to be derived from a decision not to refund.” (Ibid., 832.10/6–556)

3. This paragraph was crossed out on the source text, apparently by Holland.

4. Holland made the following handwritten comment on the source text: “Bill, if possible I’d like to have memo by end of day June 8.” No such memorandum, however, has been found in Department of State files.

   On June 22, representatives of the Departments of State and the Treasury, and the Export-Import Bank met to consider Brazil’s application for financial assistance. A final decision was made, in which all present concurred, to defer refunding matter until Bank officials met with representatives of the Brazilian Government to determine the most effective manner in which the United States might assist in carrying out the Brazilian program of economic development. Refunding would then be considered in the context of the overall development program rather than merely on its own merits. (Memorandum of conversation by Bernbaum, June 22; Department of State, Central Files, 832.10/6–2256)