822.51 Et 3/6: Telegram

The Secretary of State to the Minister in Ecuador (Bading)

17. Your 14, October 24, noon.

Department informed that loan contract gives new bonds priority and exclusive claim custom house receipts as well as revenues from [Page 935]all sources. If correct this would appear to be a violation of Article 17 of the contract of September 30, 1908, incorporated in the arbitral award of November 24, 1908,19 which states that the sums required for the annual service of the railroad bonds and for the expenses of the service “shall constitute a first and preferred obligation on the total receipts of the custom house” and that after December 31, 1908 “there shall exist no obligation whatever against the customs revenues that may have preference over or pari-passu with that assigned in favor of the bondholders” and that in future the Government “will not establish any obligation whatever against said revenues to the prejudice of the bondholders’ rights”.

Department also informed that Government apparently intends to obtain control of railway bonds and then to foreclose as bondholder and seize the railway. It is stated that the bankers under the new contract are not obliged to convert specific amount of railway bonds and that a small per cent could have preferred claim of the revenues from all sources and furthermore that the contract provides for the liquidation of the internal debt at par and accrued interest and of the external debt at 50 per cent its value.

Please report by cable whether above is correct and if so cable text of articles in question. Full copy of contract should be sent immediately by mail.

Should the above information be correct and should you deem immediate action imperative to protect the American rights involved you may informally call to President Tamayo’s attention the provisions of Article 17 of the contract of September 30, 1908, which would be violated should the custom house receipts be pledged for any other loan and inform him that this Government must insist upon the rights of the American holders of the bonds of the Guayaquil and Quito Railway Company being fully protected and that it cannot consent that the owner of the railway, an American corporation, the stock of which is principally [but] not entirely held by Americans, should be deprived of its property without proper consideration.

Upon receipt of your report further instructions will be sent you.

Hughes