The Minister in Portugal ( Dearing ) to the Secretary of State

No. 842

Sir: I have the honor to call the attention of the Department to Decree No. 9761 of June 3, 1924, a copy of which I enclose herewith,1 regarding payment of interest on the Portuguese external debt. In this connection I beg to refer the Department to my despatch No. 702 of February 15, 1924,1 in which I reported the action of the Portuguese Government in determining to pay interest in paper at a fixed rate of exchange on the internal 6½ percent loan of 1923.

Both these measures are ruinous for Portuguese credit and become all the more alarming in the suggestion they carry that they are progressive steps on a downward path towards repudiation. They are a sort of repudiation because in both instances the obligation was to pay interest in gold or its equivalent.

The last decree would also seem to indicate that the budget and exchange questions are proving too much for the abilities of the present Government. These questions are by no means simple and the abilities mentioned are not extraordinary.

The decree affects to lay the burden only upon Portuguese holders of the external debt but my Dutch and Belgian Colleagues tell me, and they say our French Colleague feels the same, that in the arrangements for paying foreign holders their nationals are discriminated against in favor of the British. My British Colleague tells me he has only sent a summary of the measure to his Government. Everyone, however, condemns the decree and suspicion as to what the Government may do next is very great. It is pointed out that in certain previous cases where the Portuguese Government had the option of paying interest and redeeming bonds in German marks, it took advantage of its technical right to do so and practically robbed all holders of such bonds of their property.

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The decree is being violently attacked and there is a strong movement in the Parliament to have it revoked. It is doubtful whether this will be done. Meanwhile, as the renewed downward movement of the exchange would indicate the situation grows worse and confidence is more seriously shaken than ever.

In case any American holders of the Portuguese Government’s external securities approach the Department, I shall be glad to have the Department’s instructions. Some of my Colleagues, the French, Belgian and Dutch, feel that the decree must be met with a protest at least and are so reporting to their Governments.

The decree may be summarized as follows:

After pointing out the difficulties of balancing the budget on account of falling exchange and attempting to justify the measures already taken in the case of the 6½% loan of 1923, it is stated that the same principle must be applied to the external debt, the various, issues affected being mentioned.

An appeal is then made to the sense of patriotic duty and the self interest of Portuguese holders of the bonds, who are told that they are called upon for a temporary sacrifice, and it is announced that interest and redemption shall henceforth be paid, under certain conditions in escudos, which means paper escudos.

In justification it is pleaded that Spain and Italy have done the same thing under similar circumstances. A system of stamping is devised to identify bonds held by Portuguese and to distinguish them from those held by foreigners.

For the convenience of the Department I enclose to the Department herewith a rough translation2 which in spite of its shortcomings will, it is hoped, enable the Department to seize the various details. Special attention is called to the time limit—until July 30, 1924, mentioned in Article 5—provided for foreign holders who may wish to secure their rights as to interest and redemption payments.

I have [etc.]

Fred Morris Dearing
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