to Mr. Evarts.
Mexico , December 16, 1878. (Received January 2, 1879.)
Sir: On the 6th instant the Mexican executive sent to Congress a contract made by the minister of finance with certain holders of government bonds, which contemplates a new funding of the public debt, coupled with an arrangement for the construction of an extensive system [Page 765] of railroads in Mexico. The instrument, however, should more appropriately be termed bases for future contract, as in its express terms it binds no one but the parties who may hereafter enter into the arrangement designated.
As stated, the arrangement has a two-fold object, the funding of the public debt, and the railroad system, and the former is made dependent upon the latter. The main provisions of the agreement are as follows: The public creditors of Mexico who may enter into the contract are to construct, at their own cost, an interoceanic railroad from the city of Mexico to some point on the Pacific Ocean between San Bias and Mazatlan, and such other branches as they may choose, the whole to consist of not less than 1,000 kilometers, or say 625 miles, and the whole to be completed within six years from the approval of the contract by Congress. The construction and management of the road is to be upon bases hereafter to be agreed upon with the minister of public works. In consideration of the construction of the railroad, the Mexican Government agrees to recognize the public debt represented or held by the company which constructs the railroad, and to issue therefor a new consolidated fund in bonds, converting the capital and accrued interest as a rule at 50 per cent, of their face value, and which new bonds shall bear 1 per cent, the first year, and increasing 1 per cent, each year, as the building, of the road progresses, until at its completion, and thereafter they will bear 6 per cent, interest. The government also agrees to redeem and pay off in cash $8,000 of the new funded bonds for each kilometer of the railroad built; but in case it is not able to make this redemption and payment, it agrees to issue new bonds therefor, which, together with the coupons on the funded bonds, shall be receivable for 10 per cent, of the customs and other federal taxes. Nineteen separate classes or descriptions of public debts are to be admitted in this agreement, which embrace the London bondholders, the English and Spanish convention debts, the Carbajal-Corlies American bonds, and all kinds and descriptions of the domestic or interior debt, including claims for forced loans, damages, back salaries, pensions, &c; but it is expressly provided that none of these bonds or obligations are to be prejudiced in their present status, if the holders thereof do not enter into this agreement.
As I have stated, the contract was submitted to Congress on the 6th instant, and the approval of that body is required before it can have any binding effect or validity, but an adjournment of the session occurred on yesterday without any action whatever being taken upon the subject, so that the whole matter is held in abeyance until the next session in April.
In addition to the general interest which our country feels in the prosperity and development of the resources of Mexico, which would be greatly improved if such an arrangement as that contemplated could be carried out, many of the citizens of the United States are pecuniarily interested in the subject as holders of the Carbajal-Corlies bonds, which are allowed to be embraced in the agreement. To them it presents three questions: 1st, the probability of the ratification of the contract by Congress; 2d, the practicability of the scheme, and the ability of the Mexican Government to meet its obligations thereunder; 3d, does it offer them greater probabilities of payment of the principal or interest of their bonds, or of security therefor than they now hold?
The first question, as to the probability of the approval of the scheme by the Mexican Congress, is difficult to answer with any degree of assurance. The contract was made by the government mainly to arrange a settlement with the London bondholders, and there has always been, both in Congress and the country, a strong opposition to such a measure, [Page 766] and up to the present time has prevented any agreement, but the executive has strong hope that it will be approved at the next session.
Second, as to the practicability of the scheme and the ability of the Mexican Government to meet the obligations stipulated: The first difficulty will be to find any sufficient number of bondholders who will be willing to form a company and contribute the necessary funds to inaugurate the building of the railroad. It will require considerable capital to commence and carry forward such a work, and with the experience already had by the bondholders as to Mexican investments, it presents a very doubtful question. The only persons likely to undertake it are the London bondholders. If this class of bonds are alone represented in the company, and the road is built, it will require on the part of the Mexican Government during the next six years the payment in cash, in redemption of funded bonds and interest, of say from $12,000,000 to $18,000,000, according to the basis upon which the old bonds are funded. If other classes of bonds are also represented in the company, and the funded debt and interest proportion ably increased, the cash payments of the government will be likewise increased. When it is remembered that the government has not paid its current subsidy to the only completed railroad in the country for nearly three years, and that there is due thereon approximately $2,000,000, and that the current revenues are insufficient to pay the army and government employés, some estimate may be formed of the ability of the government to meet its obligations under the proposed scheme.
On the third question, as to whether the condition of the American holders of Mexican bonds would be improved either as to probability of payment of principal or interest or as to security thereon, several points are to be noted. It has been seen that it is proposed to fund the debt to be embraced in the contract at 50 per cent, of its face value. In many classes of bonds interest is to be forfeited altogether, and in all others, except the American bonds, to be allowed at 50 per cent, of the amount due the latter, however, to be allowed in full, for which the executive is entitled to all proper consideration. When it is remembered that the American bonds were issued to obtain arms and materials of war to maintain the republican government of Mexico against the European intervention and the Maximilian empire, it would seem that there is no good reason why the American bondholders should be placed on the same footing with European bondholders, whom the republican government have always charged with sympathizing with and aiding the intervention and empire. The American bonds bear 7 per cent, interest, and are secured by a pledge of a large body of public lands and 60 per cent, of the receipts of several important custom-houses, and of the federal and State taxes in two States of the republic. If these bonds are surrendered and the new funded bonds are accepted under the contract inclosed, the holders thereof consent to a reduction of one-half of the principal of their bonds, a great diminution of the rate of interest, and, as a security for payment, only 10 per cent, of the federal customs and taxes, and are placed on a level with all other creditors entering into the agreement, whatever may have been the origin of their bonds, besides incurring heavy obligations for the construction of a long line of railroad.
It would hardly seem, therefore, to offer much inducement to the American holders of Mexican bonds. Although, as stated in my No. 802, the Mexican Government has not paid interest on the bonds, according to their tenor, since their issue in 1865 up to the present date, it has always recognized them as a valid debt, and it is to be hoped that at no [Page 767] distant day it will make effective the solemnly pledged security for the payment of principal and interest which its financial necessities have induced it to divert to other uses.
I inclose herewith a copy and translation of the contract referred to, together with a printed copy of the documents sent to Congress with said contract by the minister of finance.
I am, &c.,