Foreign Relations of the United States Diplomatic Papers, 1938, The British Commonwealth, Europe, Near East, and Africa, Volume II

860C.51/1278

The Consul General at Warsaw (Bevan) to the Secretary of State

[Extract]

No. 2279

Warsaw, January 18, 1938.
[Received February 3.]

Sir: …

. . . . . . . . . . . . . .

The Ministry of Finance has manifested a strong desire to arrive at a solution of the debt-default situation that would be satisfactory to the Department of State from the standpoint of non-discrimination. In this connection, the extension of the guaranteed multiple-currency clause to sterling Stabilization bonds and the question of an offsetting advantage to American creditors prompt the following comments.

The Ministry of Finance is believed to be willing to fix the permanent rate of interest on all non-funded loans held in the United States at 4½ per cent.^* It regards as eminently fair an offer that produces 5⅘ per cent. (under the multiple-currency option) to American holders of the Stabilization Loan who bought even at par and that will yield about 5¾ per cent. net to American holders of all Polish external dollar bonds when calculated for the entire duration of the issues. Naturally, those holders who paid less than par will gain more; the Ministry claims that such persons own a large, if not the larger, portion of the amount outstanding in the United States. A calculation shows that average quotations on the New York Stock Exchange during the ten years prior to the partial default of 1936 produce a yield of 8½ per cent. for the loan of 1920,² 10 per cent. for that of 1925³ and 11 per cent. for those of Upper Silesia⁴ and Warsaw.⁵ In the case of the Stabilization Loan, the average quotation for the 5 years prior to the fall in the dollar’s exchange value produced a yield of 9½ per cent.; after that event, the multiple-currency clause brought about a yield of 16¾ per cent, in 1933 and of 18 per cent, in both 1934 and 1935. The Ministry not only regarded such returns as unfair but was criticized domestically for continuing to transfer the interest payments that made them possible. The refunding operation that was clearly indicated and would have corrected the situation was not possible, but the enforced default is regarded as such a corrective measure brought about by the natural course of events. In the Ministry’s estimation, the stigma of default is considerably lessened by the fact that it continued for three years to honor agreements containing terms which the necessities of the situation forced them to accept at the time they were negotiated but the faithful observance of which could no longer be justified under the changed conditions of those three years.

The Ministry of Finance is not only convinced of its fairness but points with pride to the fact that New York bankers and American bondholders have confirmed that the above-mentioned minimum yield of between 5½ and 6 per cent. is equitable. It appears that American financial circles and bondholders have been canvassed regarding the matter and that the Ministry believes they are willing to accept less than the latters’ representatives—the Bondholders’ Protective Council⁶—are demanding. This fact, judging from the attitude and remarks of certain officials,^† has undermined the bargaining position of the Council with the Ministry. They have concluded that the Council disregards, and is even inimical to, banking opinion in New York and they believe that it may be necessary for the Ministry itself to disregard the Council eventually.

With the Ministry convinced of its own fairness to American bondholders, supported by American banking opinion, not averse to disregarding the American Council, faced with the threat of curtailed British credits and confronting the repercussions of a difficult domestic situation—an objective appraisal on the ground, based on these and other factors, throws serious doubt on whether the Minister of Finance,⁷ who has never been kindly disposed to American bondholders, would be willing to make any substantial sacrifice to them in order to offset the additional fifty or sixty thousand dollars that broke the impasse in London. The extension of the multiple-currency clause in a non-guaranteed form to British bondholders⁸ would have placed them on a basis of equality with American, Polish and other holders of Stabilization Loan dollar bonds⁹ or converted bonds of that Loan,¹⁰ thus correcting what the Ministry regarded as actually a discrimination against the British. The extension of the guarantee to them alone is naturally discriminatory, but they possess such immediately effective means of coercion—in contrast to the American bondholders—that the Ministry will probably seek to justify itself with the latter in various ways, for example, by maintaining that the guarantee will recompense the British in the future for what its absence cost them in the past. The Ministry feels that, in the final analysis, it must be the judge of what shall be given to American bondholders and the deference shown to the Department and the Council, as the defenders of the principle of nondiscrimination, is based fundamentally on the desire to have their moral support in maintaining the national credit reputation on a market that may open its doors again. The Ministry, however, does not regard their support to be as materially useful as the approval of those financial interests from or through whom Poland is most likely to secure further loans in the future.

Respectfully yours,

Thomas H. Bevan

1. As judged on the basis of talks with Counselor Rucinski. [Footnote in the original.]
2. Republic of Poland 20-Year 6% U. S. Dollar Gold Bond Loan of 1920.
3. Republic of Poland 8% External Sinking Fund Gold Dollar Bond Loan of 1925.
4. 7% Province of Silesia External Gold Bond Loan of 1928.
5. 7% City of Warsaw Gold Bond Loan of 1928. For the detailed descriptions of the Polish bond issues referred to here and hereafter, see Foreign Bondholders Protective Council, Inc., Annual Report, 1938 (New York, 1939), pp. 840 ff.
6. The Foreign Bondholders Protective Council, Inc., was a nonprofit, semipublic organization incorporated on December 18, 1933, formed at the request of the Secretary of State, the Secretary of the Treasury, and the Chairman of the Federal Trade Commission of the United States for the protection of the rights and interests of American holders of public securities of foreign states and other governmental subdivisions. See Foreign Relations, 1933, vol. i, pp. 934 ff.
7. Director Domaniewski and Counselor Rucinski. [Footnote in the original.]
7. Eugenjusz Kwiatkowski.
8. See the memorandum of November 29, 1937, by the Assistant Adviser on International Economic Affairs, Foreign Relations, 1937, vol. ii, p. 542, and footnote 34, p. 543.
9. 7% Stabilization Loan Bonds of 1927.
10. By an ordinance of the Minister of Finance dated May 15, 1937, provision was made for conversion of the original bonds into 4½ percent zloty bonds of the Internal State Loan of 1937. See Annual Report, 1937 (New York, 1938), pp. 635 ff.