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

332. Minutes of the 246th Meeting of the National Advisory Council on International Monetary and Financial Problems, Washington, July 3, 1956¹

Washington, July 3, 1956

[PARTICIPANTS]

• Mr. W. Randolph Burgess (Acting Chairman), Treasury Department
• Mr. Andrew N. Overby
• Mr. Elting Arnold
• Mr. Henry J. Bittermann
• Mr. Herbert V. Prochnow, State Department
• Ambassador Ellis O. Briggs
• Mr. Jack C. Corbett
• Mr. Marshall M. Smith, Commerce Department
• Mr. George Wythe
• Mr. Arthur W. Marget, Board of Governors, Federal Reserve System
• Mr. J. Herbert Furths
• Mr. Robert Sammons
• Mr. Samuel C. Waugh, Export-Import Bank
• Mr. Hawthorne Arey
• Mr. Charles Shohan
• Mr. John Cady
• Mr. Hale T. Shenefield, International Cooperation Administration
• Mr. Frank A. Southard, Jr., International Monetary Fund
• Mr. John S. Hooker, International Bank
• Mr. Gwynn Garnett, Department of Agriculture, Visitor
• Mr. Ralph W. E. Reid, Bureau of the Budget, Visitor
• Mr. Edmond C. Hutchinson, Bureau of the Budget, Visitor
• Mr. George H. Willis, Acting Secretary
• Mr. Allen J. Fisher, NAC Secretariat
• Mr. Victor A. Mack, NAC Secretariat

1. Brazilian Request for Refunding Loan and Development Credit Earmark

Mr. Arey outlined the history of relations between the Export-Import Bank and Brazil in recent years, including the $300 million credit of February 1953 and the $75 million credit of February 1955. He pointed out that more than $75 million of the former credit had been repaid, and that only $45 million of the $75 million credit had been drawn. The Brazilians wanted the Bank to refund the balance of the $300 million credit over a 20 year period. The Bank felt that refunding would only postpone payments to the very period when the Brazilians would have to make payments on any future long-term credits received in their development program. Also, Brazil was in a good position now with $90 million in lines of credit with commercial banks which were not being used, and with average dollar earnings running about $72 million a month as against $47 million last year. Furthermore, if the Bank refunded the debt it would be necessary to charge a higher rate of interest than the present 3½ percent.

The Bank thought that Brazil’s objectives could be accomplished just as well by the continuance by the Bank of supplier credits, and that if Brazil liquidated the short-term debt she would be in a much stronger position in 1960 to service long-term development loans. The latter would carry as one condition a waiting period on principal repayments until about 1960, which would be consistent with the Bank’s usual practice with respect to development loans where only interest is collected during the construction period.

It was on this basis that the Bank suggested to the Council the proposal set forth in NAC Document No. 1963² that the Bank inform the Brazilians that it would be prepared to have discussions with them. The Bank would wish to consider programs on a case-by-case basis. It had information on a number of projects, such as public and private power and grain storage, and could announce some credits very shortly.

Mr. Arey also pointed out that the proposal contemplated that the Brazilians would be given opportunity to bring in applications which had been previously submitted to the International Bank, if they so desired.

On the matter of refunding, the Brazilians would be informed that the Bank would be prepared to extend maturities on short-term obligations falling due over a certain period of months, on the basis of some formula (e.g. that dollar receipts had dropped over a certain period below a certain minimum and Brazil had used its bank credits and its own lines of resources).

Mr. Waugh commented that on the occasion of President Kubitschek’s visit to the United States, the Brazilians had immediately discussed their relations with the Bank. The main problem went back to the $300 million loan of 1953. Mr. Waugh thought that a great deal of progress had been made with the reduction of the loan by $75 million, and that it would be most unfortunate to extend the loan. It would be immeasurably better if Brazil could pay the loan promptly. He pointed out that in recent hearings Congress had wished to write into the record that they did not like balance-of-payments loans of this character.

Mr. Burgess commented that the Working Group Study on Brazil (NAC Staff Document No. 749, Revised)³ was a very helpful one. He added that the foreign debt of Brazil was not large for a country of its size and industrial capacity but the maturity of the debt was very badly arranged. Brazil was also a country with very poor credit and with a serious problem of inflation. The question was how steps could be taken toward the two objectives of reestablishing credit and checking inflation.

Mr. Prochnow agreed with the emphasis on the management of the Brazilian economy and the reestablishment of their credit. He was also in agreement with the suggestions made by the Export-Import Bank.

Mr. Marget said that the Federal Reserve Board accepted the program as outlined. However, he was troubled by the fact that there was no evidence that the Brazilians were going to be able to harness their inflation. Neither in the budgetary field nor in the field of credit had the required steps been taken. He hoped the Export-Import Bank would support any pressure from the fund or elsewhere to follow more rigorous policies.

Mr. Waugh said that the Bank had given a great deal of consideration to the point Mr. Marget had just made. They did not overemphasize it because they thought they might be considered presumptuous by the Fund. The Bank would support the Fund and would hope the Fund would support the Bank.

Mr. Smith⁴ said that he endorsed everything that had been said so far. He asked whether the Export-Import Bank had any idea of the magnitude of the development loans they would have to consider. Mr. Arey replied that one estimate was for about $807 million, made up of about $300 million for electric power, $100 million for transportation, $60 million for ports and shipping, and about $347 million spread out over various items in smaller amounts and for shorter terms.

Mr. Smith asked whether these amounts were in addition to normal supplier items. Mr. Arey said that the Bank thought they included some of the supplier items. In discussions with the Brazilians the Bank had not thought it advisable to ask what their whole program amounted to.

Mr. Smith further inquired whether the development loans would necessarily be dollar loans. Mr. Waugh said they would be for dollar requirements. Mr. Overby suggested that the phrase “United States goods and services” be substituted for “dollar requirements” in paragraph 2 in order to make clear the kind of financing contemplated. This was agreed.

The Chairman said that he read paragraph 2 of the proposal, which referred to taking into account the general economic conditions and policies of the country, to imply that the Export-Import Bank would be proceeding pari passu with the steps the Brazilians would take. Mr. Arey expressed agreement unless it meant that the Bank should say that it would only make loans provided the Brazilians took certain specified actions. It would rather be a matter of working along with the Brazilians.

The Chairman said he understood there was no idea of opening up a credit line and going ahead regardless of developments in Brazil. Mr. Waugh agreed. Mr. Overby suggested that the introductory paragraph of the proposal indicate that the discussions would deal with the economic problems of the Brazilians as well as with their applications for loans. This was agreed.

Mr. Shenefield⁵ said that the International Cooperation Administration was generally in agreement with the Export-Import Bank proposal. Mr. Reid agreed that the approach as amended was entirely reasonable.

Mr. Garnett⁶ observed that the Department of Agriculture had a stake in Brazil but had no comment on this particular proposal. The Chairman asked about the status of sales to Brazil under P.L. 480 for local currency. Mr. Garnett said one program was just being completed and a 3-year program was under negotiation. The Chairman inquired whether some of the local currency derived from these sales would be loaned. Mr. Garnett replied that it was hoped a large amount would be used to take care of the local currency component of power projects. Mr. Shenefield added that ICA was about to sign a $30 million loan agreement covering the purposes for which the local currency would be used and much would go to subsidiaries of the American and Foreign Power Company.

Mr. Overby suggested that the last part of paragraph 2 of the proposal be changed to read “including projects which Brazil may wish to transfer from the International Bank to the Export-Import Bank”. He added that the International Bank had been warned by him that it was quite possible that Brazil might wish to transfer some projects to the Export-Import Bank. As of the moment, the International Bank was not enthusiastic about making further credits to Brazil.

The Chairman observed that it was recognized that Brazil was a country in which the United States had very special national interests. This relationship tended to lean toward doing more through the Export-Import Bank than through the International Bank. Mr. Overby added that he had advised Mr. Black of the position that borrowers seeking to finance United States goods and services normally may look to the Export-Import Bank as the source of financing.

The Chairman pointed out that there might be parts of the program which could be worked out most appropriately with the International Bank. There was no attempt to make the program exclusively the property of the Export-Import Bank any more than of the International Bank.

Mr. Prochnow thought there should be some reference to private capital in the proposal. Mr. Overby suggested that this might be done by inserting in paragraph 1 a reference to what might be done “by Brazil to attract private capital”. This was agreed.

Mr. Southard stated that the Fund had had two missions in Brazil in 1956. However, the prospect for energetic Brazilian action in the field of domestic stabilization and systematic overhaul of their exchange system in 1956 was very poor. Currently the Brazilians were running an average of more than $60 million of dollar earnings per month so they did not have pressures arising out of balance-of-payments crises. However, he thought the proposal represented a perfectly adequate approach and the Fund would continue to work on the Brazilian problem with a tacit understanding with the Export-Import Bank that pressure for housecleaning would be all to the good.

Mr. Waugh commented that President Kubitschek had considerable political knowledge and courage, and had indicated he would be willing to do some things which would make him an unpopular president.

Mr. Southard observed that he had only been speaking of the present calendar year. The Brazilian Government had a difficult political problem in its relations with the Brazilian Congress since it was a minority party. The chance for drastic reform in the early days of the new administration had been missed, but if inflationary pressures built up again something might be done.

The Chairman observed that the implication of the proposal was that the Export-Import Bank would hold to the schedule of maturity of loans. Mr. Waugh said that any weakening on that point would be tragic from the standpoint of the Export-Import Bank. Mr. Southard agreed with this observation.

The Chairman stated the consensus of the Council was that the Export-Import Bank should go ahead along the general lines that had been presented.

The following action was taken (Action No. 901):

“The National Advisory Council advises the Export-Import Bank that it has no objection to the proposal for discussions with the Brazilian Government outlined in NAC Document No. 1963 (Revised).”

Mr. Waugh said that he wished to make two final comments. One was to emphasize again the confidential nature of the discussions and the need to safeguard against leaks. The other was that if any branch of the Administration had any conditions precedent to suggest, the Bank should have them before and not after it got into the negotiations.

1. Source: Department of State, NAC Files: Lot 60 D 137, Minutes. For National Advisory Council Use Only.
2. Ibid., Documents.
3. See footnote 6, Document 328.
4. Deputy Assistant Secretary of Commerce for International Affairs.
5. Adviser on International Monetary and Financial Affairs, Office of the Assistant to the Director of ICA for Finance.
6. Administrator of the Foreign Agricultural Service.