832.51/861: Telegram

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

14. For the Executive Committee of Bondholders Council from Clark:

No. 5, January 25, 1934. Replying to the Executive Committee’s No. 6.

Paragraph 1, my No. 4. I said I was “assured” of preparation of decree as summarized in my cable; apparently earlier draft decree is now completely redrafted. I will advise of its terms as soon as I definitely learn them. The changes in grading and service appear still to be left as reported in my number 4 though I am not sure about one million-pound extra amortization fund.
Reference to realization loan. If Executive Committee definitely instructs me to endeavor to secure modified form, I will, of course, follow instructions, but the responsibility is theirs, not mine.
Before they give such instructions I desire they carefully consider following points:
This loan is now disproportionately favored by its grading; it properly belongs in grade V.
No purely dollar loan approaches it in preferential treatment, with its 100 percent interest and partial amortization, though at least one dollar loan, the Maranhão, is at present in a position to be as fully served as the realization loan.
The whole plan as originally drawn was rigged to favor unduly sterling loans “and franc” or loans in which there were large sterling interests.
We have accepted, properly I think, basis of classification as between Federal and non-Federal loans; we can justify this to American bondholders. But I do not see how we can justify to great bulk of American bondholders the preference proposed for this realization loan. In this connection, someone will ask whether these bonds are widely distributed or closely held by issuing houses and banks. The answer will mean much to the bondholding public.
If I shall have accomplished anything here when I get through, it will be only because I have based my arguments on the equities of the situation and the disproportionately favorable treatment given to some loans. This argument all but destroyed if we begin to play favorites.
Your paragraph second. The words are “regularly served”, not “fully served”. However, in revised draft decree which I have seen, paragraphs 4 to 9 inclusive are omitted.
Will attempt to arrange for publicity as you suggest.
As soon as I can get permission for publicity I will advise.
Apparently the Brazilian Government is now making its own decision on the whole question, disregarding both British and our representations where they think their interests better served thereby.
As your cables are in clear, it is reasonable to assume they have them available. Of course, one has no right to expect, under normal circumstances, that negotiations under such conditions can succeed. It seems to me the Department of State should be willing, we having no code, to assist us by permitting the use of their codes. [Clark.]