Papers relating to the foreign relations of the United States, 1930, Volume III
812.51/1611
The Ambassador in Mexico (Morrow) to the Secretary of State
[Received July 31.]
Sir: I have the honor to refer to my despatch No. 2632 of July 17, 1930, and my telegraphic despatch No. 157 of July 23, 1930, in regard to the negotiations now being carried on in New York between Mr. Montes de Oca, the Mexican Minister of Finance, and the International Committee of Bankers on Mexico.
On the morning of July 23, 1930, Mr. Lamont, Chairman of the International Committee, called me on the telephone to inform me of the status of the negotiations. I also talked to Mr. Anderson who has been assisting Mr. Lamont in the negotiations. Captain McBride subsequently talked to Mr. Anderson and Mr. Munroe, the Secretary of the International Committee. I enclose memoranda of these conversations.
Respectfully yours,
Memorandum by the Ambassador in Mexico (Morrow)
Mr. Lamont, Chairman of the International Committee of Bankers on Mexico, telephoned me about 9 a.m. (Mexico City time). I talked to both Mr. Lamont and Mr. Anderson. The former gave me a general outline of the recent discussions in New York with Mr. Montes de Oca in regard to the direct government bonded debt. Mr. Anderson similarly outlined the negotiations in regard to a reorganization [Page 468] of the National Railway of Mexico (for the railway negotiation, see Captain McBride’s memorandum of even date of his talk with Mr. Anderson10).
Mr. Lamont said that no agreement on the Government debt had yet been reached but that there was an even chance that one might be reached providing for the following payments:
| $12,500,000 | in | 1931 | (including $5,000,000 to be paid within 30 days of signing the agreement); |
| $13,000,000 | in | 1932; | |
| $13,500,000 | in | 1933; | |
| $14,000,000 | in | 1934; | |
| $14,500,000 | in | 1935; | |
| $15,000,000 | in | 1936; | and annually thereafter for the life of the agreement. |
Out of these payments the Committee, on behalf of the bondholders, would provide a current service including both interest and amortization on the principal of the bonds and also for retirement of all interest in arrears. Mr. Lamont indicated that this agreement if made would be a firm one as between the Committee and the Mexican Government and would not be conditional on any general program including agreements with other classes of creditors. He stated that he understood that Mr. Montes de Oca’s view is that if he made an agreement of this nature with the Committee to cover the bonded debt, it would be possible for him to make suitable provision for other classes of creditors.
I reminded Mr. Lamont that this was the natural position for an inexperienced insolvent debtor to take,—he preferred to ask each creditor separately to make such arbitrary concessions as the circumstances of the moment determined, and to make new promises without provision for performing them. That was the easy course. The result was that the debtor generally remained insolvent instead of dealing with his situation as a whole. Shortly after Mr. Montes de Oca had come into office, he had made a new contract with the Mexican Land and Colonization Company cutting down the amount payable under a previous contract made by Pani; he very shortly had to break that contract. The new contract made with the Committee would be exactly like their old contract, except that it would be for a smaller amount,—it would still be a contract with an insolvent nation unless and until it became part of a coordinated program. I further pointed out that we had been endeavoring for almost three years now to get the Mexican Government to recognize the importance of its promises. Her old promises could not be kept in accordance with their terms, but she could at least improve her credit by not making any new promises [Page 469] without provision to perform them. If once a firm contract with the Committee were made and announced, many of the other creditors of Mexico might think Mexico was out of her financial difficulties and stiffen up their terms, with the possible result that Mr. Montes de Oca would either arbitrarily break the contracts with the other creditors or the new contract with the Committee, or the contracts with both. Any promise that Mr. Montes de Oca made to the Committee was necessarily conditioned by the facts, even if not made expressly conditional. It therefore seemed to me wise to make it expressly conditional.
I advised Mr. Lamont that the State Department and the Embassy must necessarily look at any separate agreements made by creditors with the Mexican Government at this time from the point of view of whether or not they contributed to a general program of getting Mexico back on her feet. The State Department and the Embassy must also look at any agreement from the point of view of its effect upon other claims of Americans who were not represented by the International Committee, including the claims of those Americans which the United States Government directly represented. Of course the Committee could proceed along the line that it thought best, but, if any new agreement was made as an isolated transaction and without making any provision for other creditors, I might have to advise the Mexican Government that I considered such an agreement was not a constructive step towards financial stability.
I told Mr. Lamont that I did not wish to appear in any way as obstructing his difficult negotiations; that without knowing what the outcome of the negotiations would be, I had prepared this morning a rough draft of a statement which might serve as an announcement at the end of the present negotiations. I then read the statement to him over the telephone, advising him that this statement was prepared, of course, only as a suggestion. Mr. Lamont told me that he thought Mr. Montes de Oca wanted to make a definite agreement and would not make any such statement. (For text of statement see Captain McBride’s memorandum of even date attached hereto, giving his conversation with Mr. Munroe, the Secretary of the Committee.11)
In the talk with Mr. Anderson I asked him whether Mr. Legorreta was negotiating with Mr. Montes de Oca for the Banco Nacional. Mr. Anderson responded that he was, and stated that he thought the Banco Nacional was extending the time for the payment of its claim against the Mexican Government. I asked him if the bank was making any reduction in the size of its claim, and Mr. Anderson said he thought not. I expressed doubts as to whether the new contract with the Committee could be performed if all the other creditors insisted upon terms similar to those of the Banco Nacional.
Memorandum by the Naval Attaché in Mexico (McBride)
About 9 a.m. (Mexico City time) Mr. Lamont called the Ambassador on the telephone. After the conversation between the Ambassador and Mr. Lamont (see the Ambassador’s memorandum of even date in regard to this conversation12) I took the telephone and Mr. Arthur Anderson gave me some of the details in regard to the discussions which have been going on in New York covering a proposed reorganization of the National Railway. I understand the following to be the principal points on which tentative agreement has been reached:
- (a)
- If a plan of reorganization is agreed upon it will be embodied in a draft memorandum which will set forth the procedure to be followed in a reorganization of the Company under the Mexican Commercial Code.
- (b)
- A new company will be formed.
- (c)
- Of the capital stock of the new Company, 65% (including all common stock) will be issued to the Mexican Government, in return for which they will issue a new concession to the new Company which will replace the numerous old concessions under which the National Railways now operate. This new concession will be for a term of 45 years.
- (d)
- The remaining 45% of the stock of the new Company will be issued to the present holders of the bonds of the National Railway and its subsidiaries.
- (e)
- A new issue of consolidated junior mortgage bonds will be exchanged for the present outstanding bonds of the National Railways and its subsidiaries.
- (f)
- These new junior mortgage bonds will, for the first few years pay interest at only 2½ % per annum. As the net revenue of the Railway increases, the increase will be divided in some proportion, which Mr. Anderson did not specify, between raising the current rate of interest on the new bonds to 5% and retiring the interest now in arrears on the old bond issues of the National Railways and its subsidiaries.
- (g)
- A new issue of senior mortgage bonds will be authorized for the purpose of raising new capital as necessary, but none of these bonds will be issued at this time.
- (h)
- All existing outstanding obligations between the Mexican Government and the National Railways on account of money owed [Page 471] by one to the other will be washed out on the assumption that the respective claims are practically a stand-off.
- (i)
- No understanding has been reached in regard to any foreign participation in the active management of the railways, nor has any specific provision been made for representation of the minority stock or of the bondholders on the Board of Directors.
Memorandum by the Naval Attaché in Mexico (McBride)
Subsequent to my telephone conversation with Mr. Anderson (see my memorandum of even date), I read over the telephone to a stenographer a rough pencil draft of a statement drawn up by the Ambassador to illustrate what he considered might be a proper outcome of the discussions in New York in regard to the Mexican Government’s direct bonded debt represented by the International Committee.
About 10:30 a.m. (Mexico City time) Mr. Vernon Munroe, Secretary of the International Committee, called me on the telephone and read me back the text of this statement as they had taken it down during my previous telephone conversation with Mr. Anderson. I made some minor corrections and modifications of the text. Copy of the statement is attached.13
I then said to Mr. Munroe that I was not sure that the Ambassador had made clear to Mr. Lamont in his previous conversation his feeling in regard to an immediate cash payment to the Committee. I said that of course Mr. Munroe knows the reasons for our objection to any new agreement on the bonds which was not made conditional on the successful completion of a program for dealing with other creditors as well as with the bondholders. On the other hand, however, we see no objection to an immediate cash payment of a reasonable amount, such, for instance, as that proposed in my suggestions of June 21 (twenty million pesos), to be used for buying up old interest in arrears obligations pending the making of a firm agreement as part of a general program. This procedure would be equivalent to retiring the interest in arrears at a rate of 5 or 10 cents on the dollar. I pointed out that such a procedure would make it easier for the Mexican Government to pursue in the immediate future a similar course of buying at a discount claims of other creditors. Mr. Munroe replied that he thought he understood my point.
Copy of Statement Prepared by the Ambassador in Mexico (Morrow)
The Committee and Mr. Montes de Oca have together reviewed the current income and expenditures of Mexico for a series of years, the various obligations of Mexico, and her estimated budgetary requirements for expenditure other than debt. Mr. Montes de Oca points out that since January 1, 1928, the Mexican Government has been meeting all of its current requirements with cash, including a substantial program for constructing roads and schools, but not including its obligations arising from the agrarian program, cash provision for which is now under consideration. The Mexican Government has had a cash balance at the end of each year applicable for debt payment, which balance has been, however, insufficient to meet interest charges on all of the debt. The difficulty of the Treasury has been how to apportion this balance among the various classes of creditors.
The Committee has expressed a willingness to recommend to the bondholders represented by them a reduction in their debt provided substantial reductions are also made in the debt not represented by the Committee and provided also that certain reforms, which Mr. Montes de Oca has himself suggested, are made in the budgetary practice of Mexico, particularly with reference to the payments on debt.
Mr. Montes de Oca contemplates meeting with various other groups of creditors, both foreign and domestic, not represented by the Committee. These meetings will be held in Mexico City in the near future. Mr. Montes de Oca believes that if the other creditors of Mexico are prepared to deal with the financial situation in the same spirit of generous cooperation as has been shown by the International Committee, Mexico is at last in a position to constitute a budgetary program for debt payment that can be performed. If this can be accomplished, it will be of great advantage not only to all the creditors of Mexico but also to the Mexican people.