832.51/854: Telegram

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

7. From Clark for Executive Committee Bondholders Council: Number 3, January 9, 1934. Your attention is invited to the following: [Page 609]

Present Brazilian Government is nonconstitutional, though Constituent Assembly now in session here is reported to have sought to give it some sort of legal status; the Government maintained itself (according to the general opinion) in 1932, primarily because the Navy remained loyal, aided by large part of Army; generally accepted that continued existence of the Government is dependent upon loyalty of armed forces; the question of its self-preservation overshadows all other questions; signs of dissatisfaction in Government ranks reported; a Cabinet “crisis” has existed for several weeks and is not yet settled though seemingly nearing settlement; the Constitutent Assembly, now redrafting the constitution, is reported as spending much time on extraneous matters and may be playing for time; every state now has a governor (interventor) appointed by the Central Government, all governors elected by the people, except one who died, having been displaced; there appear to be two opposing factions, one seeking the early reestablishment of constitutional government, the other favoring a military dictatorship of some sort. The best informed British and American observers express their belief that present political situation is most serious since the revolution and that anything may happen at any time. Nevertheless situation probably more stable than foregoing might suggest.
Statistics concerning revenue, budget and debt service are available there, but it should not be overlooked that this Government borrowed (in effect) in December 1932 from the Bank of Brazil 400,000 contos to balance budget for 1933.
The capital of the Bank of Brazil is 100,000 contos and it shows equal amount of reserves; the Brazilian Government is reported to own better than 70 percent of the total capital; as indicated the Government itself owes the bank 600,000 contos; in addition, large sums have been borrowed by local state governments from branches of the Bank in various states; by a decree recently promulgated, the Government has apparently absolved agriculturists from paying 50 percent of their secured indebtedness, and is issuing 500,000 contos of bonds with which to indemnify creditors; according to reports, the Government has bought considerable munitions, including airplanes; it is projecting the revamping of the Navy including the scrapping of old ships and the buying or building of new ones, and plans the completion of the modern fortification of Bio harbor. Satisfying Navy aspirations may be a political necessity.
While the trend of revenues is apparently upward the expenditures are also rising. Some think Brazil will soon be in the market for more money for foreign purchases—a possibly hopeful element to the point that she may really wish to arrange bond service. Excessive local needs, should they arise, could probably be met for a time with the printing press.
Meanwhile dissatisfaction among coffee growers is reported as increasing; they are a powerful financial and political element; but reports are that their dissatisfaction is more or less chronic.
On this showing with a revolutionary Government in a position where it may actually have to fight to live, or if not reaching this extremity, then still under the probable necessity of placating discordant and disgruntled elements in its own ranks by virtual gifts of public funds in large amounts, the practical present money value of any debt service plan is a question. That a plan now negotiated could have a bearing legal and moral (for good or for ill) on future adjustments seems certain.
Furthermore, in other countries constitutional governments succeeding nonconstitutional governments have repudiated the fiscal acts of the latter.
It is possible that these or similar considerations explain the failure of the British interests to try to push this present plan, for personally I feel (though the Embassy staff does not agree with me on this point) that the British could in view of our delay have brought this matter to a conclusion if they had really wished to do so.
It is probable that the most now possible is to secure modifications of the present plan along broad lines in some of the matters covered by the telegram of January 2d. The situation here is not a banking situation with a willing solvent creditor but a political situation with a necessitous insolvent creditor that is regarded by some to be a serious if not critical position. Technicalities of bond service and matters of liquidators’ exchanges may not receive much consideration and despoiled, disgruntled bondholders have been endemic in Brazil for 50 years.
. . . . . . .
The foregoing suggests that the Council should not permit itself to be placed in the position of having to justify its existence by the successful outcome of these Brazilian negotiations.

Cost of telegram for account of Bondholders Council. [Clark.]