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

No. 1062

Sir: I have the honor to report that during the months which have supervened since the conclusion of the Brazilian-American blocked credit agreement of February 21, 193644 the American concerns at Rio de Janeiro which are interested in the settlement have not suggested Embassy intervention in the various discussions as to the detailed working out of the agreement. It is possible, however, that the Department may be interested as a matter of information in the progress of these discussions and of the execution of the agreement.

With regard to the so-called small creditors it will be recalled that a sum of $2,250,000 was provided for cash settlement. This sum was based upon the best possible estimates of the probable total amount of the various individual claims under $25,000 each; but since the conclusion of the agreement so many creditors have come forward that the $2,250,000 has proven inadequate, and it has been necessary to restrict the cash settlement to claims of $18,000 or less. Payments exceeding $18,000 will be covered, along with the other larger claims, by series of Bank of Brazil notes. The Bank of Brazil states that it is this week forwarding instructions to the Guaranty Trust Company at New York to proceed immediately to pay the claims under $18,000.

The agreement provides, in connection with the larger claims, for the addition of 10 percent to the total of each claim in lieu of interest over the 56-month period during which the Bank of Brazil notes will be maturing. The total amount which the Brazilian Government will be forced to pay in the form of this additional 10 percent will be somewhat less than $3,000,000; and the intention has been to consider this sum as a portion of the $30,000,000 provided by Brazilian legislation. Under protests made by the National Foreign Trade Council at New York the Brazilian Minister of the Treasury, Dr. Arthur de Souza Costa, has orally advised the Bank of Brazil that he believes [Page 296] it may be advisable to yield on this point. Presumably he will consider this as an ordinary interest charge incurred by the Brazilian Government, payable under the ordinary appropriation acts. If the amount in question is not deducted from the $30,000,000 appropriated by the Brazilian Congress then the payment of the $2,250,000 for the small claims will leave the sum of $27,750,000 available for the large claims.

Between $14,000,000 and $15,000,000 of large claims have been definitely approved; but something more than $4,000,000 out of them will not be paid immediately because due to firms which have also put forward claims still in dispute. It is planned that these firms shall receive a general settlement after their contingent claims have been adjudicated. Something more than $10,000,000 of the approved claims is to be paid immediately. The series of notes covering this sum total more than 9,000 individual notes, all of which must bear the signatures both of the Bank of Brazil and the Brazilian Treasury. While special officers have been delegated to do the work of signing it, it seems probable that at least a week to ten days may elapse before the series of notes are ready for despatch to New York.

Setting aside the approved large claims and the amount now in process of being paid to the small claimants, something like $13,000,000 will probably remain out of the legislative appropriation of $30,000,000. This amount must be used in settlement of claims aggregating approximately $19,000,000; so that on the average the claimants can only receive approximately a 70 percent settlement if all are treated on the same footing. Paragraph 13 of the agreement of February 21, 1936, provides that if the total claims are found to exceed $30,000,000 the claimants (after settlement of the smaller claims), shall receive preference in the following order:

  • “(a) for amounts already deposited in milreis,
  • (b) for amounts which may be deposited until March 23, 1936 and, finally,
  • (c) for amounts deposited between that date and July 1, 1936.”

The claims already approved in full, aggregating as stated between $14,000,000 and $15,000,000, virtually represent those covered by provision (a); but differences of opinion have arisen in connection with the application of provisions (b) and (c) to the remaining claims.

At least one of the large American petroleum companies operating here made complete deposits prior to March 23, 1936, whereas it is understood that the other petroleum companies, as well as most of the other claimants, did not make more than 40 percent of their deposits prior to the date in question, completing the remainder in monthly installments in April and May. There has apparently been some disposition on the part of the Brazilian authorities to feel that those concerns [Page 297] which completed their deposits by March 23rd are hardly entitled in equity, despite the existence of provision (b), to preferential treatment. The Brazilian authorities appear to have suggested that the distribution of the approximately $13,000,000 be based upon the dollar claims presented at New York to or through the National Foreign Trade Council, as listed at the time the agreement was signed, and not upon the milreis deposit situation at Rio de Janeiro. This system would result in paying less to the petroleum company which made all its deposits (the Texas Company), and also less to the Paulista Rail-way claimants, than the distribution according to provision (b). The petroleum companies in the aggregate woud benefit, however. The National Foreign Trade Council is insisting upon distribution strictly in accordance with the milreis deposits at Rio de Janeiro, i. e. with the terms of the agreement as cited.

Next in magnitude after the claims of the petroleum companies, which aggregate somewhat more than $10,000,000 are the claims in connection with the railroad rolling stock and other material furnished to the Paulista Railway by American firms such as the Pullman Company, the Westinghouse Company and the General Electric Company. These are understood to aggregate close to $6,000,000. The goods in question were imported into Brazil principally between 1924 and 1926, and the arrangement was that they were to be paid for by a series of notes issued by the Paulista Railway maturing over a number of years. As the credit of the railway was good the maturity-dates of the notes in question were deferred from time to time; so that when the system of Brazilian official exchange was instituted in April 1931 the amount of notes indicated above was still outstanding, and their payment at the official rate of exchange was blocked. The Brazilian Treasury Department is said to feel that the transactions in question were essentially similar to the issuance of bonds by other railways, and amounted to railway loans rather than to commercial import transactions. The fact that the Paulista Railway notes could well have been retired prior to the establishment of the official exchange control seems also to have been taken into consideration. There is said to have been some pressure from certain wealthy and influential Paulista families interested in the Railway, as the latter would naturally benefit by an opportunity to pay off its notes in dollars secured at the official rate under the blocked credits agreement; but this pressure has perhaps been resented at Rio de Janeiro. This may partly account for the apparent desire of the Brazilian authorities to base the distribution of the $13,000,000 upon the dollar claims in New York rather than upon the milreis deposits here,—a procedure which would not favor the Paulista Railway claimants. This distribution has even been referred to informally by Bank of [Page 298] Brazil officials as an “equitable” rather than a “contractual” distribution.

Very confidentially it may be reported that the Bank of Brazil has worked out the two possible distributions at the rate of 65 percent of each claim approximately as follows:

Classes of Claims Based on Milreis Deposits at Rio de Janeiro Based on Total Dollar Claims, New York
Petroleum Companies $7,400,000 $6,100,000
Paulista Railway Claimants 3,900,000 4,300,000
Other Claimants   1,100,000   1,600,000
Totals $12,400,000 $12,000,000

The Department will note that in each case the total amount would fall considerably short of $13,000,000 so that the actual distribution may be made at the rate of 70 percent instead of 65 percent and may be somewhat larger for each category of claims.

There can be no question but that the Brazilian authorities are rather preoccupied with the idea of making adjustments which will be not only satisfactory but as fair and just as possible; but it would appear that the National Foreign Trade Council may be able to make good its insistence upon the terms of the agreement. As previously stated, no suggestion has been made whatever that the Embassy should intervene, and the Embassy on its part has scrupulously and entirely remained aloof from the discussions. After the distribution shall have been effected it is possible that those claimants who shall have only received 70 percent or less of the amounts which they have asserted to be due to them may press for some further provision by the Brazilian Government; and this might result in new appeals to the Department or the Embassy. On the other hand it is quite conceivable that they may decide not to carry the matter further, as some of them perhaps privately admit to themselves that their claims have not been altogether moderate.

Respectfully yours,

Hugh Gibson
  1. Not found in Department files.