839.51/3723

The Assistant Secretary of State ( Bundy ) to the Minister in the Dominican Republic ( Schoenfeld )

Dear Schoenfeld: We have studied the question which you raised in your despatch No. 352 of April 19, in regard to the possible funding of the floating debt. While we are inclined to agree that funding the floating debt, were it possible, would be helpful in easing credit and restoring confidence in the Government, we do not see how a formal funding operation can take place without squarely raising the issue involved in Article III of the Convention. The situation appears to be as follows:

The floating debt is a part of the public debt of the Dominican Republic. It is immaterial that this debt is not funded or in some liquid form. It no longer represents current accounts balanced by current revenues but is now a cumulated liability of the Government, estimated at over $3,000,000. This represents an obligation which must be carried over from one fiscal period to another until it can be liquidated. It is clearly a portion of the public debt. The next question which must be determined is the bearing of Article III of the Convention on the increase in the Dominican public debt which is represented by this floating indebtedness.

Under normal conditions liabilities contracted by the Dominican Government for the payment of current supplies or services, which would ordinarily be liquidated in thirty or sixty days and which, in any event, would not be carried over as a deficit from one fiscal year to the next, should not be considered an increase of the public debt within the meaning of Article III of the Convention. Under such conditions these liabilities would not represent a claim against future revenue or a form of debt readily susceptible of funding. Furthermore, this Government could not undertake to enter into such close supervision of Dominican finances, as would be involved in keeping control over such month to month expenditures, nor would it be desirable to attempt such supervision even were it found possible. It is not believed, therefore, that the provisions of the Convention were designed to apply to such current indebtedness.

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On the other hand, an attempt to fund the large floating debt which has been carried over from year to year represents quite a different problem. It would appear to be a matter of fact that an increase took place in the public debt as soon as the Dominican Government was unable to settle outstanding bills from revenues available during the yearly accounting period. Nevertheless, unless this debt be funded it can be assumed, in theory at least, that the increase is of a temporary nature due to the exigencies of a situation beyond the control of the Dominican Government; that the Dominican Government proposes to liquidate this non-interest bearing debt as soon as it can and therefore does not have the intention of making a net increase in its public debt within the meaning of Article III of the Convention. The moment an attempt is made to fund this debt by the issuance of internal bonds, or other instruments of this kind, the Dominican Government takes a formal step to incorporate a $3,000,000 debt in its public debt structure and by this action obligates itself to ask the approval of the United States to this step under Article III of the Convention. The fact that this new debt would be for the purpose of consolidating the floating debt would not appear to alter the obligation; otherwise, the treaty provision in question might largely be set at naught through the creation of a large amount of floating indebtedness followed by its funding.

We feel, therefore, that for the Dominican Government to raise the issue of funding the floating debt might be very embarrassing to both Governments. In view of the fact that the Dominican Government is now diverting funds which are due for the sinking fund requirements of the Convention bonds, there would be great difficulty in consenting to an increase in the public debt. To scold the Dominican Government for its shortcomings would be a futile line of action not helpful to the bondholders, not conducive to preserving good relations between the two Governments or to maintaining our prestige with the Dominicans. My feeling is that the less we have to do with this question of the floating debt the better.

As Dunn will soon be in Washington we will, of course, go into this question with him at some length and I feel hopeful that we can discover some solution which will be constructive, while still avoiding the troublesome features which I have pointed out above.

The Dominican situation, all things considered, seems to be working along satisfactorily and we would like to be helpful and not do anything to destroy President Trujillo’s morale or the present spirit which he is showing to cooperate in financial matters. In the light of the various points which I am now bringing to your attention, I would appreciate having your further views and suggestions on this general problem.

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We have been waiting for a suitable occasion to discuss with Despradel the various points which you mentioned in your despatch No. 352 but as Despradel has now sailed for Santo Domingo we have not had an opportunity to do so.

Very cordially yours,

Harvey H. Bundy