The Minister in El Salvador (Corrigan) to the Secretary of State

No. 555

Sir: I have the honor to refer to the Department’s telegram no. 1, of January 10, 7 p.m., and to report that, in accordance with the instructions contained therein, there has been informally indicated to the Salvadoran Government the pleasure of the United States Government at the substantial progress which has been made towards a [Page 573] settlement relative to the external debt; and the hope expressed that the negotiations might lead to a successful conclusion.

For the Department’s information, there is provided a short review of the present stage of the negotiations. This information was supplied informally and confidentially by Mr. Douglas Bradford, Secretary and representative of the Bondholders’ Committee, and the views presented are, in general, his opinions.

The face value of the bonds outstanding at the present time, of all series, is approximately $16,900,000. According to the terms of the original contract, annual payments for interest and amortization amount to $1,750,000. Mr. Bradford and the Ministry of Finance are in substantial agreement, on the following basis: Payment of interest at the flat rate of 4% on the total amount of bonds outstanding (or $680,000) plus 1% amortization ($169,000) or a total of $849,000 per year. This is to be an unvarying annual payment, so that, as the bonds are retired, the amount no longer required for interest on them will be devoted to making the sinking fund cumulative. The agreement is to have effect as of July 1, 1935, with payment of the coupon due on that date.

It will be seen that this is a substantial recession on the part of the Salvadoran Government from its demand, last May, of interest rates of 3%, 2% and 2% on the three series of bonds. (Actually, the 4% interest referred to above will be divided so as to pay 51/2%, 4% and 3½% on the “A”, “B” and “C” bonds.) In consideration of this concession, the Government is insisting on the cancellation of the scrip issued in payment of interest on the “C” bonds. It is understood that the British Bondholders Committee has indicated its willingness to accept this arrangement; but the American Committee feels unable to do so, as it does not hold nor represent the scrip, and as much of it has been sold in the open market, by the bondholders, and is widely held.

The amount of scrip now outstanding is about $1,080,000. It is now quoted in New York at about 24%. Mr. Bradford has suggested to the Government that it might agree to pay half the annual amount specified in the original contract, or $875,000, using the difference ($26,000) between that sum and the amount already agreed on, for retirement of the scrip, presumably in the open market at reduced quotations. While expressing its appreciation of the fairness of this offer, the Government has indicated its inability to accept such a settlement. Last May, it took the loan negotiations into the newspapers and continually emphasized its stand for interest rates of 3%, 2% and 2%. In order to obtain popular acquiescence in the flat 4% rate as now agreed upon, it requires some important quid pro quo, in order to explain and justify its action to the public. The issue, therefore, is a political one, from the Government’s point of view.

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The American Bondholders Committee has still not indicated its willingness to recommend the cancellation of the scrip to the bondholders, and a settlement apparently hangs on this one point alone, for the Government is understood to have receded from its insistence on re-writing the contract in Spanish and the deletion of the “safety” clauses. To call the Government’s demand “repudiation” of the scrip is to use a perhaps unnecessarily ugly word. El Salvador regards such cancellation as part of the negotiated settlement, and as an essential quid pro quo, required by local politics.

Mr. Bradford has prepared an extremely interesting graph, of total receipts from import revenues in El Salvador, and world prices for Santos No. 4 coffee. The two lines are exactly parallel; and he rather inclines to the opinion that present low coffee prices, coupled with the highly unfavorable coffee outlook, according to its world statistical position, and the probable impossibility of obtaining better terms, should induce the American Bondholders Committee to recommend to the bondholders the cancellation of the scrip (perhaps with some arrangement to purchase scrip sold by bondholders), pointing out that if negotiations are again unsuccessful, it is highly probable that there will be no further efforts to reach a settlement during the remainder of the administration of President Martinez, or longer. Any agreement reached five or ten years from now, he believes, would hardly include payment of interest for the intervening period; so that the choice to be presented to the bondholders is that of sacrificing the old scrip in consideration of resumption of payment of interest and amortization as of last July; or of receiving nothing for the next five or perhaps ten years.

Respectfully yours,

Frank P. Corrigan