Foreign Relations of the United States Diplomatic Papers, 1934, The American Republics, Volume IV

832.51/849: Telegram

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

Washington, January 2, 1934—6 p.m.

1. For Reuben Clark from the Executive Committee:⁶⁸

“The following is for your guidance in connection with the discussion of Debt Plan:⁶⁹

(1) We welcome the Brazilian Government’s initiative in proposing a comprehensive Plan for servicing Brazilian national, state and municipal obligations. We desire that the Government obtain the maximum benefit from this initiative through the improvement of its credit here and hence assume that the Government will recognize the importance of allocating available exchange in a manner that both American and other bondholders will recognize as equitable.⁷⁰

(2) We have no facts which would justify us in suggesting any increase in the total amount of exchange to be presently made available under the Plan and do not propose [to] suggest an increase unless on the basis of your examination of the situation you feel that amount to be made available is less than could reasonably be asked of Government.

(3) The Council took up the consideration of the Brazilian Debt Plan immediately upon its organization 2 weeks ago and is prepared to carry through its examination of the Plan with the Government as rapidly as possible. The Council has, however, no specific authority from the bondholders to represent them and no power to accept legal responsibility for changes in carrying out existing contractual obligations. To the extent that such changes are made, the Government must assume the responsibility therefor.

(4) Our suggested modifications with reasons therefor and queries on the Plan are given below following order of the Plan itself:

(A) Grade I. We recognize the special position of funding loans but believe extraordinary amortization proposal is disproportionately favorable. We suggest that exchange amounting to 600,000 pounds which it was proposed to allocate to this purpose be specifically applied toward increasing service of bonds in Grades below IV.

(B) Do you concur necessity proposed payment 150,000,000 French francs before end of 1934 as we understand contemplated. We appreciate special character of this obligation in view of Hague award⁷¹ but this payment throws heavy burden on Government in near future.

(C) We recognize special conditions of coffee realization loan 1930 but in view of heavy sacrifices which Plan imposes on other bondholders, suggest possibility of making somewhat less exchange available for sinking fund than now proposed (for example, by retiring say 5 per cent, per annum of original principal amount through market purchases) and specifically applying as in (A) above amount of foreign exchange thus saved which on some such basis should be for next few years somewhere between $1,000,000 and $2,000,000 over saving proposed under Plan.

(D) Regarding Grades III and IV what is reason for the uninterrupted allocation of foreign exchange during the past 2 years on the coffee institute loan? We note under table in Plan this loan would receive approximately as much foreign exchange in 1934 as all Grade VI loans combined, though our calculations don’t check with service figure 244 given for this loan. Please verify. Institute loan apparently not a commodity secured loan but by taxes like a large number of other secured loans with much lower rating. Also is there any good reason for exceptional position accorded two other São Paulo loans through inclusion in Grade IV?

(E) We appreciate reasons for according national Government loans a privileged position although credit standing of national Government formerly no higher than that of certain states and municipalities. However, disparity of treatment between national loans and loans in Grades V and VI is very great, particularly taking into account recent favorable treatment of national loans under funding plan while other loans for the most part were receiving nothing for maturing coupons. Further, we question the fairness of such arbitrary grading of state and municipal bonds as that proposed. As an alternative we suggest that this feature of Plan be modified to give effect to the principle that all provincial and municipal borrowers whose default is due to failure to secure foreign exchange be classified alike and exchange allocated to them pro rata so long as they continue to deposit the full service in milreis. This would make one Grade of V and VI with one schedule of partial payments which schedule in view of foreign exchange reallocation suggested in A and C above should be at least equivalent for combined Grade to schedule now proposed for present Grade V.

We believe it unwise for us to attempt any comparison of relative merits of loans in Grades V and VI and consider only fair basis is to treat all such debtors who are willing and able to pay in local currency on the same basis as regards allocation available exchange. If any such debtor fails to make full deposit in milreis, this might constitute a logical basis for allocating less to such debtor but any amount of foreign exchange so saved should be applied under paragraph 6 of Plan as amended pursuant to (G) below.

(F) Important to clarify the situation regarding milreis deposits under paragraphs 4 and 5 of Plan. To permit proper functioning of proposal in (E) above desirable that milreis deposits be initially made in some central depositary such as the Bank of Brazil and adequate information regarding such deposits and their eventual investment (to extent not transferred) be made available to respective fiscal agents for loans. Regarding investment of milreis and change suggested paragraph 1 in Ministry’s reply to your memorandum⁷² we confirm importance of investment in productive works but believe desirable retain original idea that such investment be pursuant to agreement if it can be decided who together with depositing debtors could appropriately be the parties to such agreement. We fear value of milreis investment for bondholders will be lost in absence of more effective measures of control. We consider this at the same time one of the most important and as drafted one of the weakest and most inadequately defined features of the Plan. It is difficult to send further comments until we hear from you what you consider feasible in this regard after consultation with the Government. In this connection we have inadequate information as to present status of past milreis deposits for provincial and municipal loans and Plan apparently makes no provision regarding such deposits. Please advise on this point.

(G) Referring to point 2 of your memorandum and paragraph 6 of Plan, we consider that at least part of the further foreign exchange which may be set apart under Plan, should be applied to pro rata increase schedule of interest payments but we would not object to a part going toward the purchase of bonds in the market on some agreed basis as between amount allocated to current interest and to bond purchases.

(H) Proposal to cancel or defer matured coupons against October 1933 partial payments seems open to objection particularly in view of fact that there are deposited milreis against such back interest and if such coupons cancelled or deferred result would be to deprive coupon holders of any benefit from such deposits. Suggest possibility of stamping coupons with payments as made without cancelling or deferring unpaid portion either of matured or currently maturing coupons. Proposed outright cancellation would have unfavorable psychological effect although we appreciate that in view of the debt burden the prospect of any early realization on such unpaid portion of such coupons is problematical.

Effect of cancelling past coupons would be that many Grade VI bonds would then receive as of October 1933 an amount equal to approximately 2 per cent, of the face amount of five coupons matured since transfers stopped at end of 1931 whereas holders national Government loans are currently receiving for such coupons funding bonds with present market value of approximately fifty, thus giving a disparity of twenty-five to one as between value of payments these two types of loans during period covered by the five coupons. This disparity might be somewhat reduced if past matured coupons not cancelled and eventually a solution might be worked out for some partial satisfaction of these coupons out of milreis deposits already made in many instances against such coupons.

(5) Regarding general question of exchange control, we understand that figures regarding available foreign exchange are not divulged thus making it difficult for creditors’ representatives to judge of actual situation and amounts available to service external debt. The Brazilian Government’s initiative in preparing Plan indicates their desire to restore their credit and we feel that this effort might be helpfully supplemented by introducing some central exchange control commission which would make position public. We realize that this may necessitate administrative and possibly legislative changes which would require time but any indication in the Plan of Government’s intention to effect some such arrangement would undoubtedly have very favorable effect.

(6) Suggest desirability of inserting in paragraph 7 that future review of debt situation would be carried out in consultation with representatives of the principal creditor groups concerned. Council would desire to be consulted in the initial stages of any further readjustment of Brazilian debt situation.

(7) Your letter of November 25th with enclosures⁷³ just received and considered in connection with this cable.

(8) Unless you are in disagreement with position we have taken on any of the foregoing points, please take up promptly with Minister after you have considered information available to you through Embassy. Please cable us Minister’s reaction.” [Executive Committee.]

Phillips

68. The Executive Committee of the Foreign Bondholders Protective Council, Inc. J. Reuben Clark, Jr., was a member of the Board of Directors of the Council; on February 26, 1934, he became Acting President of the Council and on May 8, 1934, the President.
69. See Foreign Relations, 1933, vol. v, p. 77.
70. For other correspondence regarding equitable treatment for American interests with respect to Brazilian exchange restrictions, see pp. 578 ff.
71. 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, Collection of Judgments, p. 91.
72. Neither printed.
73. Not printed.