812.51/1640

The Chairman of the International Committee of Bankers on Mexico (Lamont) to the Under Secretary of State (Cotton)

Dear Joe: Vernon Munroe showed you that long letter of mine to Dwight,18 expressing my great regret at not seeing eye to eye with him with regard to the Mexican Debt Agreement. Here is a copy of his reply to me dated August 18th,19 to which I attach a memorandum touching upon his allusion to Lord Cromer which you may find of possible interest.20 This memorandum points out that analogy between the two cases of Egypt and Mexico does not hold. If Dwight were planning to administer Mexican Government finance for the next ten years, I imagine both the foreign and American members of the International Committee would ask him to write his own book.

. . . . . . . . . . . . . .

Finally, I attach memorandum on that point of security for the new refunding debt of Mexico as arranged in the Agreement, the point which you brought up to me last Wednesday in the talk which I had with you.

Sincerely yours,

T. W. Lamont
[Enclosure]

Memorandum With Respect to Such Bonds of the Mexican Government as Originally Were Unsecured hut Under the Agreement of 1922 Were Accorded Security and Are Accordingly To Be Refunded Under the Agreement of July 25, 1930

The reason for refunding the Mexican Government obligations (originally issued as unsecured) with Refunding Bonds which have security is to be found in the record of the negotiations with the Mexican Government, looking to a dealing with its unpaid obligations, beginning in 1922 and extending down to date. In 1922 the Finance Minister offered, in return for the excessive sacrifices which he was demanding from the bondholders, certain provisions for security to be applicable to all bondholders who became parties to the Agreement.

The essential information with respect to this record was promptly furnished to and is to be found with the State Department. The Mexican Government in the July 25, 1930, Agreement proposes to refund its obligations dealt with in the 1922 Agreement (modified in 1925) by the issue in two series of a Refunding Bond which will have as security its entire import and export custom revenues. The new [Page 488] Refunding Bonds will be issued to refund obligations which fall in two classes—those which at the time of issue were given security, such as the Customs Secured Bonds; and those which, although at the time of their issue were not given security, yet following the lines of the 1922 Agreement as modified, have obtained the benefit of the new obligations secured by the revenues specified in such Agreement. It therefore appears that the present secured Refunding Bonds are being offered to the holders of obligations which either originally, or as a result of the 1922 Agreement as modified, have obtained security in the form of an obligation given by the Mexican Government in consideration of the agreement of the holder of the bonds to reduce his debt and to accept a lesser amount; on condition that the obligation to pay such lesser amount should be secured as stated in the 1922 Agreement by “the entire oil export taxes as provided in the Decree of June 7, 1921, and any increases thereof and the specified sum of $5,000,000 U. S. Gold annually payable in equal monthly instalments of $416,667 each out of the oil production taxes …” (Paragraph (c) of 1922 Agreement as modified by the Agreement of October 23, 1925).

It will be recalled that the 1922 Agreement obligation was secured not alone by the oil export taxes, but by a 10% gross railway revenue tax, and that upon the modification of the 1922 Agreement in 1925, resulting in a separation of the Government Direct Debt and the Railway Debt, the security of the railway taxes was limited to railway obligations. It will also be recalled that the 1925 amendment extended the five year period so that payments of the amounts due in respect of the settlement of the Direct Debt should not be finally completed until December, 1935, such payments being secured in the manner above stated. In 1921 many millions of dollars were due in respect of the Government’s secured and unsecured debts. It was recognized that a mere promise to pay a reduced amount gave little to the holders of such debt. In recognition of the necessity of offering to its secured as well as its unsecured debt something which would be acceptable to them, the Mexican Government provided the maximum sum that it could make available for its debt with due recognition of its other obligations, and secured such amount with the revenues stated in the law passed by Congress on September 29, 1922, and promulgated by the Executive Decree of September 30, 1922, and published in the Official Gazette in Vol. 22, Number 24. Thus was accorded to the Government debt which was unsecured when issued the security specified in the 1922 Agreement.

It will be remembered that as a result of internal disturbances, the Government was unable to make the payments which it had agreed to make in the 1922 Agreement, and consequently in 1925 it proposed a modification of this Agreement, which was accepted by the bondholders [Page 489] with the result that when the Government was again unable to perform its undertakings expressed in the 1925 modified Agreement, it undertook through a Commission created in 1927 and the negotiations in 1928, and later in the negotiations resulting in the 1930 Agreement to make such a proposal to the holders of its obligations (which had already been accorded security) as would be sufficiently attractive to them to obtain their co-operation. Obviously, such co-operation could not be obtained unless the Government was willing to give security in exchange for an obligation which had in effect already obtained security. In dealing with its debt, the Government and the International Committee of Bankers on Mexico, composed of representatives of banking houses which had been instrumental in past years in raising capital for the Government by placing obligations with investors, acted, according to its own statement, with due regard to the Mexican Government’s other obligations. As stated in the 1922 Agreement such Committee

“also recognize that the Mexican Government has other obligations which it is important for it to meet, such as the restitution to the banks of the specie fund, the agrarian debt and arrears of pay, which may have to be cared for by the issue of internal bonds or in some other manner later to be considered;”

The very material reduction in the amount of the debt which resulted in the Agreement of 1930 was also due to the recognition by the Government and by the Committee of the Government’s other obligations.

The 1922 Agreement was made in the expectation that at the expiration on January 1, 1928 of the five year period, the original contracts affecting the obligations of the Mexican Government would be reinstated. Due to internal disturbances these contracts have not only not been reinstated, but a considerable part of the interest which was deferred under the 1922 and 1925 Agreements and which received security in consideration of the reduction in the amount payable, is still outstanding and unpaid.

As between the debt accorded security at the time of original issue and that not accorded security at the time of issue, the former has of course at all times received a preference. Such secured debt under the 1922 Agreement as modified was not asked to consent to any reduction in interest during the five year period, and the overdue interest upon such debt was given a preference over that on the debt which was unsecured at the time of issue.

Following the failure of the Government to provide the sums required by the modification of 1925, there waited upon the Committee in 1927 a Finance Commission of the Government which proposed a refunding of its debt on the basis of a secured issue of substantially less in principal amount than the issue proposed by the July 25, 1930, Agreement. Again in 1928 when the Government renewed its proposal [Page 490] to refund its outstanding debt, it proposed a secured issue to be distributed among the holders of the obligations dealt with in the 1922 and 1925 Agreements.

It thus appears that since 1922 the Government has repeatedly asked for concessions from the holders of its debt and that those concessions principally have been asked from the holders of its debt which was originally issued without security. In order that such concessions might with some reason be accepted by the holders of its debt, the Government has proposed and its creditors have accepted obligations secured in the manner above stated. The debt which was afforded security at the time of its issue has consequently received secured obligations having a lien prior to the secured obligations issued to refund the balance of the Government debt, and the percentage of allocation of new bonds to the secured debt will recognize the superiority of that debt over the debt originally issued without security.

It may be well to note the provisions of the 1930 Agreement whereby the Government may use the customs revenues as security for future borrowing of additional funds, if it should choose to do so. This is a facility not contemplated by the Government’s own memorandum submitted to the Committee in 1927 and not incorporated in the provisions of the understanding reached in the latter part of 1928. While the unsecured debt, therefore, receives a pledge of revenue under the new Agreement as partial compensation for the reductions in the amount of such debt, the lien which the unsecured bondholders receive may be used to secure further bonds issued on a parity therewith.

To summarize: In all the negotiations following the failure of performance of the 1922 Agreement as modified, there was uppermost in the minds of the Minister as voiced by him or his Commission that having bargained with the holder of the unsecured debt on the basis of a very material reduction in principal of that debt and the substitution of an obligation secured by oil and other revenues, and such bargain having been accepted by over 98% of the holders of such debt, it was incumbent upon the Mexican Government to protect that settlement sponsored not only by the Committee but not questioned by our State Department nor by the other Governments concerned.

  1. Dated July 24, 1930, p. 478.
  2. Supra.
  3. Not printed.