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

No. 58

Sir: Supplementing my telegram No. 82, dated September 16, 1933, 5 P.M., I now have the honor to furnish the Department the accompanying copies of the proposed plan for the adjustment of Brazilian national, state, and municipal debts to which it referred.

There also are enclosed two copies of a memorandum prepared by the Commercial Attaché,54 in which he presents an analysis of the plan, pointing out certain features which would appear to be of concern to American holders of Brazilian bonds.

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In this connection, I may say that while the fact that a plan for the readjustment of the Brazilian foreign debts is under consideration is quite generally known, the subject has not been mentioned to me by any Brazilian official other than Sr. Bouças.

Respectfully yours,

Hugh Gibson

Draft Plan for the Adjustment of National, State, and Municipal Debts

The following announcement is made by the Federal Government of Brazil:—

1—The Federal Government being gravely concerned at the nonpayment of the foreign debt obligations of the States and Municipalities of Brazil has, after consultation with Sir Otto Niemeyer during his recent visit to Brazil, decided to put into operation a comprehensive plan for the payment of bondholders which will operate for a period terminating in October 1937.

2—The plan is designed to ensure that available foreign exchange shall be applied in equitable proportions to the service of all loans of the Federal Government and of the States and Municipalities of Brazil.

3—For the purpose of operating the plan the Federal Government has classified into seven grades all external loans of the Federal Government and of the States and municipalities as follows:

Grade I. This grade will comprise the Funding loans of the Federal Government including the amounts funded and to be funded [under?] the 1931 Funding Plan. It will also include the repayment of arrears under the Hague Award,55 which arrangement formed part of the 1931 Funding Plan. The Federal Government recognise the special character and importance of its Funding loans and foreign exchange for the full service of such loans will be provided.

Grade II. Having regard to the special conditions attaching to the São Paulo Coffee Realisation Loan of 1930 sufficient exchange will be allocated to maintain payment of interest in full on this loan. From the date on which this plan comes into operation an amount representing 50% of the full contractual sinking fund will also be made available for the purchase of bonds in the market for cancellation so long as they are obtainable below par or for drawings at par if the bonds rise to that price.

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Grade[s] III and IV. Grade III will consist of the following loans of the Federal Government:

U. S. of Brazil 5% Loan 1903
do. 5% Loan 1909 (Port of Pernambuco)
do. 8% Loan 1921
do. 7% Loan 1922
do. 6½% Loan 1926
do. 6½% Loan 1927

and the specially secured State of São Paulo Coffee Institute 7½% Loan. Grade IV will include the remaining loans of the Federal Government, the State of São Paulo External 8% Loan 1921 and the Bank of the State of São Paulo 6% Guaranteed Sterling Mortgage Loan.

Sufficient foreign exchange will be made available on or after 1st October 1933 for partial interest payment on the above-mentioned three São Paulo loans.

Interest in respect of all Federal Government loans included in these grades will continue to be payable until the end of September 1934 under the 1931 Funding Scheme; but from the close of this Scheme partial payments of interest will also be made on all such loans in accordance with the provisions of this plan, since the Federal Government is convinced that any further increase in the capital amount of the External Debt as the result of an extension of the Funding Scheme would be contrary to the interest of all parties.

No Sinking Fund payments will be transferred in respect of any of the loans in these grades.

The Brazilian Balance of Payments has now been relieved by the liquidation of certain external obligations and having regard to the terms of the 1931 Funding Scheme the Federal Government proposes to provide during the year 1933/4 an amount of not less than £1.200.000 to be applied to the redemption of 20-year Funding Bonds created under the Funding Plan of 1931. In consequence of the payment of this amount the milreis deposits in Special Account in respect of the service of the loans funded under the 1931 Funding Plan will be utilised by the Federal Government in the redemption of internal interest-bearing debt.

Grades V–VI and VII—include all remaining external loans of the States and Municipalities. Sinking Funds in respect of these loans will not be transferred for the period of this plan but foreign exchange will be held available for partial interest payments on all such loans to commence on or after 1st. October 1933, except those under Grade VII for which no exchange will be available.

4—In the case of loans other than those of the Federal Government the liability will remain with the original debtor but foreign exchange [Page 79] for the partial payments scheduled in this plan will be made available against payment by these debtors of milreis.

5—To the extent to which the full service (interest and sinking fund) of any loan is not transferred in foreign exchange under this plan milreis at fixed rates of 1 milreis=6 d., 1 milreis=12.166 cents, 1 milreis=3.105 franc, respectively, will be included in the respective budgets of the Federal Government, State or Municipality concerned and deposited in special accounts. Such milreis may be invested by the Federal Government, State or Municipality, as the case may be in existing internal obligations or as may be otherwise agreed.

6—Should it be possible during the period of the plan to set aside further foreign exchange, the Federal Government intends to apply such foreign exchange to the redemption by purchase below par of Bonds of the Federal Government or of the States and Municipalities then outstanding.

7—The plan will be reviewed not later than the Spring of 1937 when the Federal Government propose to reconsider in the light of the then circumstances the future service of all Brazilian external loans.

8—Whenever an interest payment whether partial or in full, is made under this plan, it will be made in respect of the coupon then due together with all overdue coupons (if any).

9—The classification of the loans into the various grades and percentage of service monies payable under the plan in respect of different grades are detailed in the following schedule.56

  1. Not printed.
  2. For text of judgment No. 15, July 12, 1929, in the case concerning the payment in gold of the Brazilian Federal loans issued in France, see The Hague, Permanent Court of International Justice, Series A, No. 21, 1928–1930, Collection of Judgments, p. 91.
  3. Not printed.