422.11 G 93/1321

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

No. 373

Sir: With reference to the Department’s instructions No. 377 of June 13, 1924 and No. 385 of July 17, 1924,3 requesting me to submit a report on the matter of the failure of Ecuador to live up to its contractual obligations to the bondholders of the Guayaquil and Quito Railway Co., in the matter of payment of interest on the outstanding indebtedness and the Department’s request for my personal views as to the desirability of making appropriate representations [Page 693] to the Ecuadorian Government at this time, I have the honor to report that I have given this question serious thought and have arrived at the following conclusion:

There is of course no question as to the fact of the Government of Ecuador failing to live up to her obligations, and as to the amount of interest and sinking fund due on the outstanding bonded indebtedness, figures of which are quoted in Mr. T. H. Powers Farr’s letters to the Department under date of April 17, 1924 and June 30, 1924;4 nor is there any question as to the fact that the Ecuadorian Government pledged the income from the customs in guaranteeing the payment of the interest on these bonds. However, the fact also remains that on numerous occasions in the past representations in the matter have been made to the Ecuadorian Government through this Legation, without obtaining any results whatsoever.

Mr. Powers Farr states in his letter of April 17th that “the ability of the Ecuadorian Government to pay this obligation is indicated by the recent contract entered into with the Ethelburga Syndicate for a new loan in which the Ecuadorian Government agrees to pay twice the amount of interest and sinking fund called for by the outstanding Guayaquil and Quito Railway bonds”. As the Department is aware, this Ethelburga Syndicate loan contract has not as yet materialized, and from all information obtainable on the present status of these loan negotiations it will in all probability never be, realized. The contract itself embodied terms which to any well informed person indicated that they would not be carried out.

Mr. Powers Farr further states that “the bondholders have waited patiently for Ecuador to meet this obligation in the expectation that steps would be taken to reorganize the financial structure of the country” and bases his request that the United States Government use its good offices in protecting the rights of the bondholders to the full amount of the customs pledged to them on the statement that there is no immediate prospect of relief from this source: (reorganization of the financial structure).

The Ecuadorian Government has in the past and is at the present time utilizing the revenue obtained from the aduana (customs) and from other sources for general governmental purposes, including, of course, the item of the upkeep and maintenance of the army, which in the past year has consumed 40% of the total revenue obtained by it, and the total revenue thus obtained is not sufficient to meet those expenditures, much less any obligations assumed as to foreign indebtedness. Realizing the situation, the Government of Ecuador has finally engaged the services of a financial expert in the [Page 694] person of John S. Hord, who, however, arrived here at a time when Congress was in session and who therefore did not have sufficient time to make a detailed and careful study of the finances of the country with a view to presenting a program of reform to the Congress then in session. However, since his arrival Mr. Hord has devoted his time to investigation and study, as I have had the honor to inform the Department from time to time, and is now prepared to present to the Congress which has just opened its session a complete program for the financial reorganization of the various governmental departments, as well as a balanced budget, which it is hoped Congress will endorse and adopt, and Mr. Hord informs me that this budget provides for the taking care of Ecuador’s external obligations.

Under the circumstances it would seem to me ill-timed to make representations to the Ecuadorian Government on a matter which it cannot possibly meet unless Mr. Hord’s program is carried out, and by making such representations at the present time it might possibly handicap Mr. Hord in carrying out his plans.

I have talked over the situation with Mr. Harman, president of the Guayaquil and Quito Railway Company, who is now here, as well as with Mr. Hord, Financial Advisor to the Ecuadorian Government, both of whom agree with me that by making representations to the Government at this time nothing can be gained and much may be lost.

Mr. Hord feels optimistic as to the attitude towards his program which Congress may adopt, and as he has the assurance of President elect Cordova, who takes office September 1st, that he is in full agreement with the plans so far prepared, it would seem to me that it might be a more opportune time to call the Ecuadorian Government’s attention to its delinquency in connection with these bonds in case Congress should adopt an attitude antagonistic to the proposed reforms, (which we do not now expect) in which case strong representations, in my opinion, would be indicated and opportune, and I would request the Department to give me such instructions as would enable me to use my discretion as to the time such representations might be made, and in case it becomes necessary to make these representations it is requested that I be permitted to present them in a strong and forceful manner.

With the hope that the Department will concur with my view of the situation at the present time,

I have [etc.]

G. A. Bading
  1. Latter not printed.
  2. Neither printed.