422.11 G 93/1326
The Minister in Ecuador (Bading) to the Secretary of State
[Received October 16.]
Sir: With reference to my despatch No. 373, of August 15, 1924, in which I outlined to the Department my reasons for not believing it an opportune time for calling the Ecuadorian Government’s attention to her obligations as to the interest and sinking fund due on the outstanding bonded indebtedness in connection with the Guayaquil and Quito Railway Co., as requested by Mr. T. H. Powers Farr in the letters addressed to the Department on April 17, 1924, and June 30, 1924, and in which despatch I also requested the Department to give me instructions enabling me to use my discretion as to the time representations might be made, I have the honor to report that while Mr. Hord, the Financial Expert, had informed me that the budget bill contained provisions for the taking care of Ecuador’s external obligations, it seems that all reference to [Page 696]the first mortgage bonds of the Guayaquil and Quito Railway Co., and any provisions for the future payment of interest and sinking fund on such bonds were eliminated from the budget by the Permanent Legislative Commission, just prior to the introduction of this budget bill in Congress.
Lord Hervey, the British Minister, who had come to Quito at the time of the inauguration of the President and presented his credentials as British Minister to Ecuador, just prior to his leaving for Peru had an interview with the Minister of Hacienda on this subject and had been informed by that official that the Government of Ecuador found itself unable to make any provision whatsoever for the payment of any interest and sinking fund on the outstanding bonded indebtedness of the Guayaquil and Quito Railway Company, but that the Permanent Legislative Commission had decided that if the financial condition of the country permitted there would be an endeavor made next year to find ways and means of beginning payments on the many years’ overdue interest in connection with these bonds.
. . . . . . . . . . . . . .
When, therefore, an editorial appeared in El Comercio, calling attention to the fact that any budget which did not take into consideration the country’s external indebtedness was not a budget based on sound principles, I thought the moment opportune to discuss this entire question with the Minister of Hacienda and for that purpose secured an interview with him.
I informed the Minister of Hacienda that it was not my purpose at this time to protest to the Ecuadorian Government against the continued ignoring of its obligations guaranteed by the customs receipts, but that my only purpose was to discuss with him the effect such neglect of obligations on its part had exercised on Ecuador’s credit and further informed him that my conference with him on this subject was sought merely in order to enable me to correctly inform my Government as to what were the intentions of the Government of Ecuador towards satisfying the increasing clamor and demand on the part of the bondholders for satisfaction; informing him at the same time that I had had instructions from the Department of State to bring this matter to the attention of the Ecuadorian Government, that I had, however, exercised my discretion in withholding action on these instructions, because I had understood that the budget bill would contain provisions for meeting the guaranteed obligations of the Ecuadorian Government in connection with these bonds, but that my attention had been called by the editorial in El Comercio to the action of the Permanent Legislative Commission, which had unquestionably acted in harmony with the ideas of the Minister of Hacienda, in eliminating from the budget all reference to these obligations, [Page 697]and I asked him for a frank expression of his opinion as to how the situation was to be met, and what information might be given the bondholders.
The Minister of Hacienda gave me what was presumably the same answer he had given to Lord Hervey, that the Permanent Legislative Commission had decided that the financial situation at the present time did not permit the payment of any of these external obligations at this time but it was thought some sort of provision could be made next year.
I thereupon requested the Minister of Finance to permit me to discuss the entire situation with him in a sincere and frank manner and to permit me to express to him the opinion I had formed after living in Ecuador for two years and a half, and after having given careful study to the entire subject of Ecuador’s credit and economic situation. The Minister not only gave me permission but invited me openly and frankly to discuss the situation with him.
I proceeded to outline to him that Ecuador’s failure to take definite action in connection with her external bonded indebtedness and her failure definitely to settle the Agriculturists’ Association-Mercantile Bank matter had been the principal underlying factors in destroying Ecuador’s credit abroad and had been in the past as it would be in the future the reason for Ecuador’s failure to secure a loan.
I pointed out that Ecuador invariably had failed to live up to her guarantees in the matter of the bonded indebtedness and had failed to live up to her promises in the Mercantile Bank matter; that it was expected of Ecuador that the new administration, with its intended program of fiscal reform under the guidance of the financial expert employed, find means to carry out some action which would at least in part restore confidence in her good intentions by satisfying to the best of her ability at this time the just demands of these external creditors; that I had personally had confidence that such action would be taken until Congress, which up to this time had apparently completely ignored the recommendations contained in President Cordova’s inaugural address as well as the recommendations made by Mr. Hord, the financial expert, has passed a bill which not only called for an increase in the per diem allowance for each Senator and Congressman but had also in addition to that passed a bill materially increasing the pay to the army, the latter increase totaling not less than one million five hundred thousand sucres per annum; that under such circumstances it would be exceedingly difficult to persuade the bondholders that the financial situation of the country and Government was such that it could not at least in part satisfy demands not only based on justice but secured by the absolute guarantee of the Government of Ecuador as such an attitude would imply bad faith and the effect would be disastrous.[Page 698]
I pointed out to him that my personal experience extending over a period of a considerable number of years of budget making for a city of more than five hundred thousand population had taught me that the only proper course to pursue, and the only course which would restore confidence in the promises of the Ecuadorian Government and thereby have the tendency to improve her credit situation was to cut to the bone all unnecessary expenses, such as increase in pay of the army, which at the present time is better equipped and in every respect on a far greater basis of efficiency than ever before, and it certainly was no time to provide an increase in the per diem pay of the members of Congress who were expected to have the welfare and good name of their country at heart.
I informed him that under the circumstances I hesitated to inform my Government of the actual state of affairs unless he, as Minister of Finance assured me that the course adopted so far by the Permanent Legislative Commission and by Congress met with his approval, and that if he, on the other hand agreed with me I would withhold a report which necessarily would come to the knowledge of the external creditors until it had been demonstrated one way or the other what would be the attitude of the Government and the final action; that there was now on deposit in the banks in Guayaquil a sufficient amount of money to enable the Government to make a part payment on the back interest due on these bonds and that this money had been accumulated for that purpose but withheld by action of President Tamayo merely because of the exchange situation.
The Minister was greatly impressed and rather depressed with the manner in which I presented the entire situation to him. He informed [me] that I was correct, that Congress had made a mistake and that he would immediately call a meeting of the Permanent Legislative Commission for the purpose of trying to induce them to reverse their action and would also discuss the matter with the President with a view to getting his support.
Late in the afternoon, I was called by phone and informed that the Legislative Commission had delegated Mr. Hord, the Financial Adviser, and Mr. Dobbie, the General Manager of the Guayaquil and Quito Railway Co., who had been called in by the Permanent Legislative Commission to give his opinion in the matter, to call upon me to discuss ways and means by which the situation might be remedied and the bondholders satisfied. In due course of time these two gentlemen appeared at the Legation both of them informing me that I had made a profound impression on the Minister of Finance who had outlined my position to the Permanent Legislative Commission, informing that body at the same time that he was exceedingly grateful to me for the courteous, although emphatic manner, in which I had expressed myself and that he felt convinced [Page 699]that I had the welfare of his country at heart in the position I had taken.
Mr. Dobbie informed me that if it met with my approval, the Permanent Legislative Commission had decided to provide, by decree, for the payment to the bondholders of one coupon either immediately or on the regular interest day in January and follow that up by the payment of a second coupon six months later, Mr. Hord having assured them that with the money now available additional sums could be deposited to secure these two payments and that he felt confident that he could make the necessary arrangements to secure by monthly deposits in the banks a sufficient sum of money to insure regular payments thereafter, providing however, at this time there would be no demand made for the payment of additional amounts for sinking fund purposes. Mr. Dobbie communicated by telegram with Mr. Archer Harman, President of the Guayaquil and Quito Railway Company, who is now at Huigra, and secured his consent to this arrangement with also a statement by Mr. Harman. that sinking fund requirements might be deferred until all back interest payments had been met. In accordance with the agreement arrived at between myself, Mr. Archer Harman and Mr. Dobbie, the Permanent Legislative Commission was notified that we expected the first coupon payment to be made on January 2nd, the regular interest paying date.
… I am inclined to feel confident that the action I have taken in connection with this matter was opportune and may, in all probability, result in a settlement of this old source of irritation and complaint. It is, of course, understood that the above arrangement, if carried out, will meet with the entire satisfaction of the bondholders and induce them to withhold further complaint against the Government of Ecuador.
When the necessary decrees providing for this payment have actually been issued, I will inform the Department by cable.
I hope that the Department will approve of my attitude and action taken in the above matter.
I have [etc.]