800.51W89 Hungary/170

Memorandum by the Assistant Adviser on International Economic Affairs (Livesey)

The Hungarian Minister has authority to propose to the United States to refund the indebtedness of the Hungarian Government on the basis of fifty annuities of 2% of the principal amount of the debt, without interest.

On the other hand, the Hungarian Government is perturbed about the execution of its proposal of August 16, 1937 to pay the United States $19,656.32 annually over a period of three years in semi-annual installments of $9,828.16, the first payment to be made on December 15, 1937 and the last to be made on June 15, 1940. This three-year proposal was to pay annually $19,656.32, “representing 1% of the principal amount of $1,965,632.75 due under the debt funding and moratorium agreements” (the principal amount of the Hungarian debt as funded in the Agreement of April 25, 1924 was $1,939,000, of which there is at present unpaid $1,908,560, so that the Hungarian figure of $1,965,632.75 is incorrect). The Hungarian note of August 16 contained the following paragraph:

“The Hungarian Government would leave to the discretion of the American Government what portion of the proposed payment should [Page 852] be applied to the interests and what portion to the principal. However, if it is in any way possible, the Hungarian Government would like to have 25 per centum, i. e., $4,914.08, of the proposed payment applied on account of the interest due in the respective period, and the remaining 75 per centum to the amortization of the principal, with the understanding that the whole question of the application of payments to principal and interest will be considered in any eventual subsequent negotiations for the settlement of the debt.”

The State Department’s note of August 26, 1937 replying to this proposal transmitted a notification from the Secretary of the Treasury reading in part as follows:

“The Hungarian Government should be informed that the Treasury Department will receive the semiannual payments contemplated under its proposal. The Hungarian Government states that it will leave to the discretion of the American Government what portion of the proposed payments should be applied to interest and what portion to principal. Under all the circumstances the Treasury Department feels that the proposed payments should be applied entirely to interest, and, therefore, pursuant to the offer of the Hungarian Government will apply such payments accordingly. The Hungarian Government should, however, be informed that the acceptance of such payments by the Treasury for application on account of its indebtedness to the United States can not be construed as a concurrence in the proposal of the Hungarian Government as to suspension of payments previously due, nor in any way alter the provisions of its Debt Funding Agreement of April 25, 1924, and Moratorium Agreement of May 27, 1932, with the United States or prejudice the rights of the United States Government.”

The Hungarian Government has been and is negotiating debt readjustments with holders of Hungarian foreign bonds of various issues, including pre-war bonds. In these adjustments, which provide for reduced payments on coupons over a three-year period and for a sinking fund which may be used to redeem bonds purchased by tender in the open market and therefore at prices far below par, the Hungarian proposals contemplate that the partial interest payments shall be accepted in full discharge of the coupons to which they apply. Under the terms of the Department’s note of August 26, 1937, the Hungarian payments to the United States are to be applied to interest but do not discharge any obligation in excess of the actual amount paid. While this is the result of the exchange of correspondence with the Hungarian Legation in August 1937, the Hungarian authorities appear to have difficulty in accepting this result.

The Hungarian Minister invited Mr. Feis13 and Mr. Livesey to the Legation on the evening of December 8 to discuss this matter with him and with Mr. Eugene Havas, who acts as a financial adviser to [Page 853] the Hungarian Government and its Legation in Washington, and who actually conducted the discussions in August 1937, acting with Mr. Balásy who was Hungarian Chargé d’Affaires at that time. Both the Hungarian Minister and Mr. Havas have recently returned from visits to Budapest.

The Hungarian Minister inquired whether it might not be possible to make the $9,828.16 payment contemplated in his August proposal to be made on December 15, 1937 in such a way that it would not be publicly recorded as a mere partial payment against interest. He asked whether the payment could be made in the terms of the Legation’s note of August 16, namely, “with the understanding that the whole question of the application of payments to principal and interest will be considered in any eventual subsequent negotiations for the settlement of the debt”. If the December 15 payment could be made as a payment on account, the application of which should be determined during negotiations for the settlement of the debt, the Legation’s note concerning the payment could state that negotiations for the settlement of the debt have been, or perhaps are about to be, initiated. The Minister asked whether it would be possible to learn before December 15 that the United States is prepared to negotiate and to have the fact of the initiation of such negotiations made public through the Minister’s note concerning the payment promised for December 15, 1937.

Mr. Feis said that he would endeavor to discuss the matter as promptly as possible with Mr. Hull and give the Minister an indication as to whether it would be advisable for him to take up the matter formally with Mr. Hull.

The Minister and Mr. Havas also discussed other possible methods of assuring that there be no public statement which bondholders negotiating with the Hungarian Government could use to obtain terms better than the Hungarian Government wants to give them. They were told the press will expect publication of the Department’s note of November 20 with the statement of amounts due and payable which accompanies the note, and with the Legation’s reply. The Treasury’s acknowledgment of receipt of the payment would not ordinarily be published. The Treasury might perhaps issue some statement that it had received the payment. Of course correspondents, who see the possibility of considerable news interest in the Hungarian payment, might inquire at the Treasury as to the disposition which the Treasury makes of the payment. As far as the State Department is concerned, its press releases would not raise any question as to the application of the payment unless the question were raised by the Legation’s note given to the press.

[Page 854]

At the end of a long evening of discussion, the Minister seemed inclined to think that he might on December 15 bring in a brief note merely stating that pursuant to the Legation’s note of August 16, 1937 a payment of $9,828.16 was being made on that day, by check or by payment to the Federal Reserve Bank of New York, as the case might be. At the same late hour Mr. Havas definitely said that the Minister’s authorization to negotiate was an authorization to offer fifty annuities of 2% of the principal amount of the debt. Each annuity would, therefore, be slightly under $40,000. This compares with the annuities scheduled under the debt agreement of April 25, 1924 which provided for annuities of slightly less than $68,000 from 1923 to 1932 and for annuities ranging between $76,000 and $79,000 from 1933 to 1984. Mr. Havas said that he thought this proposal might be favorably considered by the Congress particularly since settlements on the same basis with the larger debtors of the United States would give very substantial annuities and in fact annuities much larger than the United States is likely to get from these debtors.

The difficulty which the Hungarian Government is raising about the execution of its proposal of August 16 as affected by the Department’s reply of August 26 may indicate that Mr. Havas, who is of a youthful and sanguine temperament, may not have kept his Government thoroughly informed of the August discussions, in the course of which part of the note originally submitted August 16 was withdrawn by the Legation and replaced with new text taking into account suggestions made by Mr. Bell of the Treasury and Mr. Livesey. Mr. Havas, at least, thoroughly understood the American position at that time.

  1. Herbert Feis, Adviser on International Economic Affairs.