The Ambassador in Brazil ( Gibson ) to the Acting Secretary of State

No. 118

Sir: I have the honor to enclose herewith a copy and translation of a note dated November 29, 1933, which the Embassy has received from the Brazilian Foreign Office with respect to the Brazilian plan for the partial resumption of the services upon its foreign debts. The note was not received by the Embassy until the evening of December 8th.

The Department will observe that in paragraph eight the Brazilian Government fully accepts the request made by the American Government that the bondholders’ committee be permitted to submit observations regarding the plan, but reserves the right in paragraph three to take such a decision as appears best to harmonize the divergent interests.…

[Page 96]

A copy of this despatch is being forwarded to Mr. J. Reuben Clark, Junior,76 in Montevideo.

Respectfully yours,

For the Ambassador:
John M. Cabot

Third Secretary of Embassy

The Secretary General of the Brazilian Foreign Office ( Cavalcanti ) to the American Ambassador ( Gibson )

EC/67/8 (42).(22) 23.

Mr. Ambassador: I have the honor to acknowledge the receipt of the note of the 4th of this month78 with which Your Excellency enclosed a memorandum with the comments of the North American Government regarding the projected plan for the liquidation of the external debts of Brazil, Federal as well as State and Municipal.

Having examined the plan with which my colleague of the Finance Department acquainted you, the North American Government expressed the opinion that, as it has been presented, it is not consonant with the official declaration made in Washington by the Brazilian delegation on May 23rd to the effect that the Brazilian Government would make no discriminations between nations, not only with respect to the payment of loans, but also with respect to the distribution of exchange; and ended by requesting the Brazilian Government not to put the plan into execution before the representatives of the North American bondholders might be heard, in conformity with the recommendations of the Economic Conference of London for the liquidation of debts through understandings between the debtors and representative organizations of the creditors upon the basis of the capacity of the debtors to pay. In this matter the North American Government states that it has just promoted the formation of a central committee for the protection of the interests of North American holders of foreign securities, adding that the examination of the Brazilian plan affords an opportunity for the United States to put into effect the recommendations of the London Conference.
In reply, I wish to inform Your Excellency that, in giving previous information of the plan to the North American Government, [Page 97] the Ministry of Finance of Brazil had precisely in view the hearing of the suggestions of the creditors of Brazil in accordance with the recommendations of the London Conference, reserving the right, however, after hearing the interested parties, to take such decision as appears best to harmonize the suggestions, in order to guarantee perfect equality of treatment without any discrimination between nations.
It is the firm conviction of the Brazilian Government that the plan with which the North American Government was acquainted meets completely that desire for equitable treatment of the creditors of the different nations, and therefore does not contravene the declaration made in Washington by the Brazilian delegation which refers expressly to discrimination “between different nations,” inasmuch as it could not be imagined that all credits should be treated in the same degree of guaranty, independent of their nature. In the annexed memorandum in which the Ministry of Finance examines the objections presented by the North American Government, Your Excellency will find, in detail, the technical and other reasons which induced the Brazilian Government to establish the classification of the seven grades which constitute the basis of the plan, with the respective proportions of exchange to be furnished for the payment of interest and amortization.
From this, Your Excellency will find that, having stated the thesis, which appeared the most equitable, that the amount of exchange to be distributed should above all be proportional to the amount of capital employed in Brazil in each one of three currencies—to wit: about 58% in Pounds Sterling, 31% in United States Dollars, and 11% in French Francs, which is more or less proportional to the £158,000,000, U. S. $389,000,000, and Frs. 777,000,000, in which the total of the foreign debt of Brazil is expressed—the Brazilian Government should, also, take into account, for the classification of the grades, the relative guarantee given for each loan when making the contract, the circumstance of the previous funding, the solvency of the debtors, the difference of the contractual interest rate, and the actual value of the respective securities on the market.
If all these points are taken into consideration, it is easy to verify that the treatment proposed is even more favorable to the holders of securities in dollars and francs, it being appropriate, however, to observe that although these loans are expressed in determined currencies, this fact does not necessarily signify that the holders are nationals of the respective countries—which is more particularly true with respect to loans in sterling currency.
Before ending these observations of a general character, I wish also to mention that, in including in this general plan of the Federal [Page 98] Government the debts of the States, the Brazilian Government had especially in view the protection of the interests of the North American holders of such securities, and that in a general way the plan corresponds to the intense desire of the Brazilian Government to recommence the liquidation of its international obligations, giving to them the maximum of guarantees which the insufficiency of available exchange permits.
In requesting that you be good enough to transmit to the North American Government the memorandum of the Ministry of Finance, with the considerations of which this note is concerned, I wish to assure Your Excellency that the Brazilian Government will receive with the greatest consideration the observations or suggestions which the North American Government, through itself or through the organization which it judges appropriate, may wish to submit in behalf of the North American holders, and expresses in advance its thanks for its collaboration.

I avail myself [etc.]

Cavalcanti de Lacerda

The American Memorandum compares the Brazilian scheme to the recent German foreign debt payment regulations.

The comparison shows a certain analogy, but there are fundamental Brazilian reasons which prevent the two plans being considered from the same angle.

The German regulations are, presumably, still in their first six months of existence, and consequently the plan which the Brazilian Federal Government formulated was not in any way adopted from the Germans but brought into being exclusively through conditions peculiar to the Brazilian foreign debt service.

In the first place the cause, viz. “insufficiency of foreign exchange to transfer full debt payments abroad”, pertains to both.

The classification of different loans in Grades has also been very similarly dealt with, viz:

  • Full interest and amortization,
  • Full interest and no amortization, or only in part,
  • A proportion of interest only and, in some cases of Brazilian loans,
    no transference at all.

The reason for the priority of Grade I, in the German regulations, “national loans affected by special guarantees and international considerations”, would seem to hold good for the Brazilian scheme.

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The loans coming under Grade I of the Brazilian scheme are the three Funding Loans and the indebtedness to the French, known as the “Hague Arrears”.

The Funding Loans have “special character and importance” inasmuch as they represent the interest paid in scrip on three occasions when the economic conditions of Brazil and/or world conditions prevented the transference of Brazilian currency into foreign exchange.

The bondholders of the funded loans on all three occasions have helped towards the recovery of Brazil by postponing for a very long period the payment of unremitted interest, and thereby increasing the amount of available exchange on each occasion, for other international purposes.

In addition the sinking funds on the loans funded on these three occasions were, in each case, suspended for a considerable period and loans which would otherwise have been, in a great measure if not entirely, redeemed, are brought in under Grades III and IV, for which there is only exchange allotted to pay 30% and 25% of the interest and no sinking fund.

The above can be justly claimed an international consideration as distinct from their special guarantees, which afford them in the case of the 1898 and 1914 loans, a first charge on the Custom House receipts with the specially introduced payment of one part of the duties in gold, the cover for which was a first charge on the bills of exchange sold by exporters in Brazil.

The 1931 Funding bonds have a priority for exchange over all other Brazilian Federal loans.

As regards the Hague Arrears, which are also included in Grade I, as they represent payments ordained by an International Court of Arbitration, their international character needs no further support notwithstanding the fact that they have no material special guarantees.

As regards Grade II, it can be very clearly stated that the São Paulo Coffee Realization Loan of 1930, the only one therein, has very special conditions attaching to its issue.

The loan apart from the hypothecation of a tax specially created was also secured by the specific guarantee of “pledged coffee”, that is to say, particular grade coffee “the proper documents of title to which shall be deposited with the representatives in the State of São Paulo of the bankers, with an undertaking that a minimum quantity of this ‘pledged coffee’ shall be sold monthly and that a contractual minimum shall, in all circumstances, be available in every month in Santos for sale”—which is tantamount to a call on the foreign exchange produced by the first coffee sold in Santos each month.

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The remaining Brazilian loans, whether Federal, State or Municipal, have been considered under the scheme solely on their respective merits, and so classified having regard to the special nature of their individual guarantees, namely,

  • relative security,
  • previous funding,
  • debtors’ solvency or capacity to pay,
  • differing rates of contractual interest,
  • and actual market values.

It is, therefore, particularly interesting to note that an analysis of the distribution of exchange under the Brazilian scheme shows a certain rough equality of transfer, as the scheme shows:

A) That about 58% of the whole of Brazil’s external debt is expressed in sterling,

  • 31% in Dollars, U. S. Currency, and
  • 11% in French francs.

B) That the average yield under the plan is:

  • 2.36% on all pound sterling issues,
  • 2.29% on all dollar issues, and
  • 1.20% on all franc issues, but if franc issues were treated as paper franc loans throughout, as in the case of sterling and dollar loans, the average yield on franc loans would be over
  • 2.40%.

It should also be noted that although all the loans are expressed in the currency of their country of origin, it does not necessarily mean that they are now held by nationals of that country. Indeed, several of the loans expressed in sterling were partly issued on the Continent of Europe in Holland, Switzerland, Italy and Sweden.

The declaration of the Brazilian Delegation from the White House on May 23, 1933, that “the Brazilian Government will always assure all American interests completely fair treatment in connection with the service of loans and the disposition of exchange under the exchange control and will, in no way, discriminate between different nations”, would seem to have been very fully contemplated, and care taken to secure equitable and fair treatment for American and all other bondholders, in the preparation of the scheme.

From the foregoing explanation of the scheme, it certainly cannot be stated with justice that what the American Memorandum describes as “high disproportions” is, in the true sense of the expression, correct.

The analysis of the figures shows an extraordinarily close relation in the percentages applicable to each country of origin, and dealing with a subject, the principal matter of which is “the service of Brazil’s foreign debt”, the factor “Capital invested in Brazil” must be the [Page 101] all-determining point as to what is equitable or not, and an all-round average yield should assuredly be the basis on which to judge equity and fairness, and not the quantum of exchange allotted to each country of origin without regard to the greatly disproportionate volume of capital invested in Brazil by each respective country.

There are other points of resemblance between the German regulations and the Brazilian Government Scheme, and a very important one is with reference to the least favored German loans for which only a proportion of the service monies are being transferred.

The regulations provide that this proportion shall be “an identic one” in each case which indicates the relation of the transference to the capital amount involved, for example a loan of 10,000,000 marks on the supposition that the transference was 25%, would obtain remittances for 2,500,000 marks, while a loan of 100,000,000 would receive 25,000,000 marks. The first might have been all subscribed by nationals of country A, and the second by that of B, with a result that B received ten times more transference than A, but they would each receive 25%.

In the Brazilian scheme, while it is not practicable to bring in all lower grade loans on a single basis, the scheme has been carefully studied, and the result gives each “foreign currency group” as near as possible the same percentage which the transference bears to each whole group of loans in one currency, as illustrated in the above examination of the American Memorandum.

As regards providing the bondholders with negotiable scrip representing the part of national currency not transferred, this is a provision that would not suit Brazilian conditions and, among other reasons, because the exchange control here is more difficult and the currency corresponding to this scrip would undoubtedly soon come into the “black” market and swell the amount of required and unremitted foreign exchange, thus defeating the object the Brazilian Government has in view of securing an equitable distribution of foreign exchange for all international requirements.

As it is obvious that in the case of Brazil it is impracticable to be revising the situation at such short intervals as 6 months, the scheme, as the Memorandum rightly states, provides for an automatic annual increase of transfer for all the grades which only receive a partial transference of service money. The provision that any increase in the available foreign exchange shall be used for the purchase of bonds in the open market for cancellation is justifiable by providing a means of recommencing the sinking fund which so materially adds to enhancing the market quotations and thereby benefitting the capital value of all holders. In addition the surplus exchange so used in bondholders’ benefit, secures the further advantage of maintaining a uniform [Page 102] treatment for interest over a short term of years’, and does not subject bondholders to the uncertainty as to whether interest will be increased or not during the stated period.

The view that one other nation has some 4 or 5 times the American ownership in grades 1 and 2, cannot be considered fair criticism. Fair and equitable treatment is shown in the fact that while considering the respective merits’ of each individual loan the scheme has resulted, as previously mentioned, in an almost identical return of interest to each “individual currency group”, and it should not be overlooked that in group VII, for which no foreign exchange is available, one country alone has over 10 times the American ownership in that grade.

  1. Member of the American Delegation to the Seventh International Conference of American States. On November 22, 1933, Mr. Stevens cabled Mr. Clark, one of the organizing members of the Foreign Bondholders’ Protective Council, to “stop over at Rio de Janeiro and discuss with the American Ambassador and the Finance Minister the proposed external debt plan”. (832.51/830)
  2. File translation revised.
  3. See telegram No. 109, November 8, 9 p.m., from the Ambassador in Brazil, p. 91.
  4. Filed separately under 832.51/874.