832.51/799

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

No. 23

Sir: The Department has carefully examined the plan of payment of foreign obligations transmitted with your despatch No. 58, dated September 27, 1933, recognizing its importance as regulating the payment of bonds of a par value of $389,000,000, £158,000,000 and 777,000,000 French francs.

The plan may be characterized by comparing it with the recent German foreign debt payment regulations.63 Germany, proclaiming insufficiency of foreign exchange to transfer full debt payments abroad, decreed that full interest and amortization should be transferred on the Dawes loan, full interest but no amortization should be paid on the Young loan (these two national Government loans being affected by special guarantees and international considerations), and that all other German bonds, national, state, municipal and corporate, payable in foreign currencies, should be paid in full in marks by the German debtor and an identic proportion on each should be transferred into the foreign currencies, the percentage being fixed from time to time in accordance with the available foreign exchange, while the bondholders were provided with negotiable scrip representing the part not transferred but deposited in the Reichsbank. The percentage to be transferred has been fixed for a six-months period only. The Brazilian plan provides for total payments in various currencies equivalent to £8,022,000 in 1934, £8, 194,000 in 1935, £8,898,000 in 1936, and £9,900,000 in 1937, with the following grades and 1934 transfer allocations:

  • Grade 1—£4,445,000 is to pay full interest and amortization on three “funding” loans (in different currencies, outstanding in par value of $30,000,000, £31,000,000 and 201,000,000 French francs);
  • Grade 2—£2,511,000 is to pay full interest and 50% of contractual amortization on the São Paulo coffee realization loan (outstanding in par value of $28,000,000 and £10,250,000);
  • Grade 3—£244,000 is to pay 30% of the interest on a São Paulo sterling loan (outstanding in par value of £8,920,300);
  • Grade 4—£131,000 is to pay 25% of the interest on four São Paulo loans (outstanding in par value of $4,568,000, £5,562,380 and 8,366,000 Dutch guilders);
  • Grade 5—£438,000 is to pay 20% of the interest on 13 loans of the States of São Paulo, Minas Geraes and Rio Grande do Sul (outstanding in par value of $90,888,500 and £11,298,858);
  • Grade 6—£253,000 is to pay 10% of the interest on 11 issues of other states and 19 municipal issues (outstanding in par value of $89, 126,300, £14,734,460 and 43,247,500 French francs);
  • Grade 7—No foreign exchange is to be provided for 17 other state issues and 8 municipal issues (outstanding in par value of $1,980,000, £11,289,847 and 207,748, 120 French francs);

After 1934 provision is made in Grades 3 and 4 for part payment of current interest on national Government bonds and the percentages of interest payable on Grades 3 to 6 increase annually; debtors will continue to include in their budgets the full service of loans, investing the part not transferred; whenever possible during the four-year period the Federal Government will apply any foreign exchange available over the specified transfers to redeeming by purchase bonds of the Federal Government, of States or of Municipalities. It is obvious that the Brazilian plan is characterized by a wide gradation of priorities accentuated by a declaration of intent to purchase throughout the four-year period the bonds of any grade in the open market for the purpose of cancelling debt.

The Brazilian delegation officially announced from the White House 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. The proposed announcement of the Government of Brazil establishing the above schedules of payment refers briefly to consultation with Sir Otto Niemeyer, to an intent that “available foreign exchange shall be applied in equitable proportions to the service of all loans”, to “the special character and importance” of the Brazilian funding loans (Grade 1), and to “the special conditions attaching to the São Paulo coffee realization loan” (Grade 2). These phrases appear to be the only arguments offered to sustain a proposal to allocate exchange among 98 issues of securities in proportions assuring that from seven-eighths in 1934 to one-half in 1937 of the total allocated shall be distributed in paying full interest and rapid amortization on four loans (3 national and one State) while the best secured other loans of the National Government are allotted only 35% to 50% of current interest service and municipal bonds guaranteed by a strong State are to receive payment of only 10% to 15% of their coupons. As British ownership of the issues allocated to Grades 1 and 2 appears to be some four or five times the American ownership, it is difficult to believe that a scheme involving these huge disproportions can be [Page 85] justified as equitable and fair treatment of American bondholders, irrespective of anomalies and discrepancies within Grades 3 to 6.

The Governments represented at the Monetary and Economic Conference adopted in July a resolution regarding the service of external debts64 which recognized that conditions in debtor countries vary considerably and that it is not possible to lay down a uniform treatment applicable to all cases but stated that when arrangements are recognized to be necessary “they should … be made directly between debtors and creditors and be based on the debtor’s ability to pay”. It seems clear that a plan regulating payments for four years on indebtedness of over a billion dollars should not be promulgated without full consultation with the creditors affected. It is understood that this proposal has been under consideration by the Brazilian Government since May 26, 1933, at least and that during that time there has been no discussion at all with American bondholders. It is not known that the Brazilian authorities have ever made any reply to the memorandum of the American Committee on Brazilian State and Municipal loans, delivered to Mr. Bouças under date of May 17, 1933,65 and published June 3, 1933, in which the latter Committee requested that the Brazilian Government make available the necessary data to provide a basis for considering the debt problem, that a certain percentage of interest service on all bonds be transferred, and that the investment of the part paid in milreis but not transferred be left to the discretion of the individual bondholders.

It does not appear that there are urgent reasons compelling an immediate decision by the Brazilian Government to release States and Municipalities from the obligation to make effective provision for more than 20% or 10% of interest payments on their foreign bonds and to authorize them to use for their own purposes the arrears already deposited in Brazilian banks—these appear to be the immediate effects which the proposed plan would produce, the only other new element until September 30, 1934, being the promise of the Brazilian Government to make exchange available on the transferable 20% or 10% of State and Municipal bond interest. Unilateral action in this regard proposed as a general plan regulating payments over a period of four years would appear to be in disregard of the principles declared by the London Conference. The Government of the United States in the light of its present information cannot regard the proposal as consistent with the assurances made public May 15 [23] by the Brazilian delegation at Washington.

The long-established policy of the United States Government in [Page 86] matters of contractual debt has been one of non-interference in transactions between private citizens and foreign Governments. This principle is recognized in the declaration of the London Conference that cases of default should be settled directly between debtors and creditors, and in the recommendation of the Conference that Governments of creditor countries should encourage the creation of organizations in a position to represent the several classes of creditors in respect of foreign loans. In the spirit of this recommendation, this Government, as set forth in the enclosed statement66 issued at the White House on October 20, 1933, is moving to assure the establishment of an adequate and disinterested organization for the protection of American holders of foreign securities which shall have no connection with the investment banking houses which originally issued the loan but which shall directly represent the many thousands of actual holders of bonds.

While unwilling to undertake the direct settlement of private debt situations, this Government cannot view with complacency unfair discrimination against American investors as compared with the investors of other countries. Such discrimination is quickly noticed or suspected and creates a rankling sense of injustice among those affected which, particularly when large numbers of investors are concerned, may cause lasting prejudice to cooperative relations both with the debtor country and with the country whose bankers have sought and obtained unduly favorable treatment. In the circumstance of the indicated readiness of the Brazilian Government to consider a comprehensive though temporary plan of payment of all the funded foreign obligations of Brazilian Governmental entities, this Government perceives an early opportunity for putting into effect the pertinent recommendations of the London Conference favoring the negotiation with representative creditor organizations of settlements based on the capacity of payment of the respective debtors. It trusts that no action prejudicial to such a settlement will be taken in the meantime.

You may bring the foregoing position of this Government to the attention of the Brazilian Government in such manner as you deem advisable, adding orally in any case that in formulating its opinions this Government has not desired to invoke the fact of the strong unfavorable balance of trade of the United States with Brazil as an argument, although it is strongly present in the minds of American investors and would heighten the feeling which would be excited by any apparent favoring of other creditors over American creditors. The Government hopes it will not be compelled by developments to [Page 87] have recourse to the growing practice of bilateral compensation agreements.

There are enclosed for your information memoranda prepared in the Office of the Economic Adviser during study of this matter.67

Very truly yours,

For the Secretary of State:
Jefferson Caffery
  1. See vol. ii, pp. 439 ff.
  2. League of Nations, Journal of the Monetary and Economic Conference, p. 207.
  3. For text, see Bulletin No. 63 of the Institute of International Finance, conducted by the Investment Bankers Association of America, June 3, 1933, pp. 37.
  4. Enclosure not printed.
  5. None printed.