832.51/867: Telegram

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

24. For information of Department and for transmission to Executive Committee, from Clark:

His No. 6. 1. Wednesday afternoon Finance Minister and myself saw President who told me he had read and approved Minister’s whole plan and would sign it as soon as prepared for signature. I have copy of plan initialed by Finance Minister.

2. The documents comprising plan are three: (a) formal decree of President putting the plan in operation; (b) an “announcement made by the Federal Government of Brazil”; (c) schedules showing assignment of bonds to grades and the exchange assigned to each grade.

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Documents (b) and (c) are those transmitted to the Department with the Embassy’s No. 58, September 27, 1933,82 with changes noted below:

3. Referring to my telegram No. 4, January 23, 1 p.m., paragraph 10, and my No. 5, paragraphs 1, 7, and 8, British and French opposition and pressure have been increasingly stiff; the British were represented by Sir Henry Lynch, a lifelong resident of Brazil; Niemeyer himself wired he saw “neither equity nor good sense” in the “various theories advanced by the Americans”. (I hope I have not disgraced the Council); he added “I do not know why Mr. Clark should not get his instructions revised at once”; British reported as expressing frank resentment that Brazilians are dealing with us at all; much apparently made about our being false bankers, not to be relied upon in a pinch as the British are, et cetera. Result is that some modifications have been made in the plan as reported in my No. 4.

The following is plan as now approved by the President, the changes noted being alterations in the “announcement” and schedules transmitted with the Embassy’s No. 58, September 27, 1933. (See also my No. 4.)

4. First, as to the schedules:

Grade I stands, except as to item of £1,000,000 for extraordinary service as to which see paragraph 5–(c) and (h) hereof;
Grade II stands, modified as set forth in my No. 4, paragraph 6;
Grade III stands except that Coffee Institute loan has been taken from grade III and made into a grade V of which it is sole member with a percentage service for the 4 years respectively of 22[½]—25—[27]—37½. I told the Minister this was still disproportionately favorable treatment of the Institute loan and subject to all the objection I had previously made, that I could not approve it, but that the decision was for him to make.
Grade IV stands except that both São Paulo loans go to old grade V now numbered grade VI.
Grade V, new grade for Institute loan; see paragraph (c) above.
Grade VI (formerly grade V) stands with addition of São Paulo loans (paragraph (d) above), and of Rio Grande do Sul 7 percent dollar loan of 1927 up from old grade VI.
Grade VII (formerly grade VI) stands except that percentage service has been changed for the 14 to 17½—20—23½—32½. I assume reduction here from equivalency with former grade V is to furnish extra exchange for new grade V—Coffee Institute. This does not fully meet but closely approaches suggestion in your No. 1, paragraph 4(E), last sentence of first paragraph, is only 2.5 points per year under grade VI, embodying almost double that originally proposed for old grade VI.
Grade VIII, former grade VII, stands except as to issue moved up as noted in paragraph (f) above.

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5. Second, as to the “announcement” part of the decree (see document of that title in Embassy’s No. 58). This is substantially same as document of No. 58 except that material has been somewhat rearranged and except as noted below;

(a) No mention of Niemeyer.

(b) Service begins April 1934, ends March 1938.

(c) Grade II, instead of 5 percent of principal amount, the amortization specified at £1,000,000 per year, for bonds “at or below par or by drawing at par”.

(d) Under headings grade III and IV, the French bonds to be served in gold under Hague Award are named. (I am told negotiations were delayed while they agreed with France on this point.)

Third paragraph under this heading—interest payable under funding scheme until October 1934.

(e) My No. 4, paragraph 7 (a), that material now divided into two parts. First part, left in same position as in Embassy’s 58, reads as follows except as to last sentence which remains as in original:

“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 if possible to provide during the period of this plan an amount of not less than £600,000 to be applied to the redemption of 20–year funding bonds created under the funding plan of 1931.”

(f) Grade V, new, reads: Grade “will consist of the specially secured state of São Paulo Coffee Institute 7½ percent loan. Sinking fund in respect of this loan will not be transferred for the period of this plan, but foreign exchange will be held available for partial interest payments”.

(g) New heading, “grades VI, VII, and VIII” (old heading grades V, VI, and VII). New grade VIII (old grade VII) “will be the subject of a special study”.

(h) Second part of material referred to in sub-paragraph (e) above, inserted under heading “Grades VI, VII, and VIII” and reads as follows: “The Federal Government further proposes if possible to provide during the period of this plan an amount of not less than £400,000 sterling to be applied through their fiscal agents in London to the reduction by purchase below par of bonds included in grades V, VI, and VII of this plan”. The British edged in a bit here. It is my understanding bonds so purchased are also to be fully served under this plan.

(i) Addition noted to paragraph 4 in my No. 4, paragraph 7(b) now added to paragraph 5 of “announcement” and reads “will be deposited in special accounts with the Banco do Brasil on other depository banks, which will notify the issuing houses or fiscal agents of the quarterly amounts of bonds and how the surplus bonds are employed”.

(j) My No. 4, paragraph 7(c), provision now reads: “In existing internal obligations or in national productive work or as may be otherwise agreed”.

[(k)] Final clause of paragraph 5 reads: “The provisions of this clause will not apply to loans the service of which is secured by the [Page 621]actual deposit with trustees of the proceeds of specific hypothecated taxes”. (This is said to cover some bonds other than Maranhão.)

(l) My No. 4, paragraph 7(d), add words “under this plan” at end of paragraph 6 of “announcement”.

Bonds paragraph 8 of “announcement” (this paragraph originally drawn by Lynch I am told) is now amended to read as follows: “Whenever an interest payment whether partial or in full, is made on a coupon under the plan it will be made in full payment of the coupons then due, for the past due coupons (if any) will be the last to be paid on the bonds, or will be held for future adjustment”.

I was unable to retain the provision embodied in the wording of my No. 4, paragraph 7(f); but the foregoing stipulation seems to meet suggestion of your No. 1, paragraph 4(H), last sentence.

(m) A new paragraph 9 has been added reading as follows:

“9. (First paragraph as in Embassy’s No. 58.) The percentages mentioned in the schedule are percentages of the face value of the coupons concerned in the currency in which the nominal amount of the bond is expressed, the option held by certain bondholders to demand payment in alternative currency at a fixed rate of exchange being temporarily withdrawn.

Thus payments in respect of sterling franc and dollar bonds will be made in and based on these currencies respectively.

All sterling payments will be calculated on the sterling value of coupons and paid in sterling currency.

All franc payments will be calculated on the franc face value of coupons and paid in franc currency, except in the case of those franc loans specially mentioned under grades III and IV in paragraph 3 above as being on a gold basis. In the case of these loans payment, although made in currency francs, will be calculated on the basis of three currency francs per one franc nominal as expressed on the coupons.

All dollar payments will be calculated on the dollar face value of the coupons and paid in dollars in accordance with the American legislation.

Owing to the uncertainties of the world currency position these provisions are necessary in order to enable the funds to be accumulated in the currencies in which payment is to be made.”

The Minister states the second paragraph of foregoing (about suspending option) was always part of plan and was suggested by Niemeyer. (This, however, is its first appearance); provisions about francs suggested by French; the sixth paragraph as originally drawn mentioned only dollars, on my objection it was amended to include sterling and francs. To my objection that if the dollar depreciated farther, we would suffer in comparison with sterling, the Minister made and intimated some rather obvious observations.

6. Referring to my No. 2, paragraph numbers 2 and 3, President raised question my authority and full powers to deal for bondholders in my first interview with him on January 10, but no other mention of the matter has been made by Brazilians; Niemeyer called attention to situation in his cable referred to in paragraph 3 hereof.

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7. In my good-bye interview with the President Wednesday I thanked them for their consideration and fairness, though noting my nonapproval of Coffee Institute position with the resulting effect on new grade VII.

8. If Council feels it could express a word of appreciation direct to Minister Aranha it would be most valuable to future relations. The Government has given us what we have in face of great British and French pressure, and in a situation getting more difficult and complex all the time. Incidentally it involved a close personal friendship between the Minister and Lynch.

9. Full text of decree and arrangement will be cabled to Brazilian Embassy in Washington, and press men here will be so told after it has gone forward. It would be most helpful to general situation if any favorable news comment about Brazil’s attitude initiating a plan for debt service in these times and in revising in our favor a plan virtually already settled, removing disproportionately favorable treatment and increasing our service, could be sent here by news agencies.

10. While the Embassy here has had nothing to do with actual negotiations, yet from the Ambassador down they have been most helpful in giving advice and helping me to keep informed of a shifting political situation. Mr. Albert Browne, the Ambassador’s secretary, has helped me as a secretary and Mr. Xanthaky of the Embassy staff as an interpreter and as news gatherer, for he understands the language perfectly, has unusually numerous contacts in high places, and enjoys the confidence of those who know him.

11. As a part of adjustment, the Minister has promised me, and confirmed it Wednesday before the President, that he will furnish Ulen Company with immediate exchange for the full accumulated milreis deposit on his Maranhao loan. My information is that no other loan has now on deposit any milreis for service (see my No. 4, paragraph 5).

I am sailing February 1st Western World. Please notify Ivor Sharp, Exchange 3–9700, Extension 5815. And please do not overlook on No. 4, paragraph 14. [Clark.]