Memorandum of Conversation, by the Adviser on International Economic Affairs (Feis)

Mr. Zoltowski, Financial Attaché of the Polish Embassy, called upon us. He had just returned from a special trip to Poland, consulting the Minister of Finance in regard to the debt terms to be offered to the holders of Polish dollar bonds. This had been the subject of prolonged discussions between the Polish Government on the one hand, and the Foreign Bondholders Protective Council and the Department of State on the other hand, prior to the payment due October 15, 1937.

The Polish proposals previously made have presented questions not only of the equity of the treatment itself but of possible discrimination [Page 638] in the treatment of holders of dollar bonds as compared with the treatment of holders of sterling bonds.

There is every reason to believe that Mr. Zoltowski exerted himself to the utmost in Warsaw to secure the best possible terms for the holders of dollar bonds. Ambassador Biddle has reported to the Department that he carried this fight to the point of proffering his resignation in a meeting of several of the most important financial chiefs of the Polish Government. My conversations with him have confirmed the impression that through him we have had a spokesman who has brought the Polish Government to offer terms as favorable as possibly can be expected of them except perhaps in minor detail.

Mr. Zoltowski states that he is about to resume discussions with the Council. He is now in a position to offer the Council as regards the one loan, which was issued in various tranches in different countries, the same treatment for the holders of the dollar bonds as will be accorded to the holders of the sterling bonds of this issue under a proposal made and accepted by the British Council of Foreign Bondholders in December 1937. This would be an offer of 4½ percent interest with a multiple currency clause which enables the bondholders to cash their coupons in terms of the Dutch guilder, and would give a yield of over 6 percent as long as the guilder may have its present value relative to the dollar. The offer to be made the Council will also contain an assurance that the yield shall in no case be less than 5½ percent in dollars. It is this minimum guarantee feature (which was wrested from the Polish Government by the British Government as part of a deal wherewith new British capital was made available to Poland), which will represent the improvement over previous offers made to holders of the dollar tranche of the Stabilization Loan; previously the Polish Government had asserted they could not extend it to the holders of the dollar bonds.

For the other dollar loans, Mr. Zoltowski said that the Polish Government would offer 4½ percent. This offer the Council had already found unsatisfactory on the ground that there is no reason why the holders of these other dollar issues should not receive as favorable terms as were granted to the British holders of the Stabilization Loan. Mr. Zoltowski stated that it was simply impossible for the Polish Government to improve this offer, that it would run into a debt load beyond their capacity and the settlement would break down.

He stated that furthermore the Minister of Finance was pressing him to seek agreement from the Council to the idea that the amortization period for these dollar loans should be prolonged to 25 years—since, as a result of the discussions in England regarding the Stabilization Loan, the amortization period for that Loan had been prolonged to 30 years. Mr. Zoltowski said this point troubled him since [Page 639] his previous conversations with the Council had been based on the idea of a twenty-year amortization period; and he stated he was prepared to continue his effort to try to have the Minister of Finance retain the twenty-year amortization period. He stated further that in regard to all the dollar loans except the 8 percent Dillon Loan,11 the 4½ percent interest offer was 65 percent or better of the original coupon which compared very favorably with most debt settlements in the contemporary world.

Mr. Zoltowski then put two questions to me:

First, how would the Department be struck if the Polish Government proposed to the Council that in the case of the dollar bonds, other than the Dillon-Read Loan, the amortization period be 25 years. I stated that I thought it would have a regrettable effect. I said I did not think this would result so much from the fact that it was a slight worsening of the terms already discussed but more directly from the fact that it would leave the impression that once again the terms offered to American bondholders were being decisively dictated by the course of negotiation in London; now they would be asked to accept worse terms because of the fact that as part of the compromise reached with the British regarding the Stabilization Loan, the amortization period for that loan had been lengthened beyond that contemplated in the original discussions. Mr. Zoltowski seemed to recognize the point clearly and without indicating it in so many words, showed a readiness to take this matter up with his Government again.

The second question was rather in the nature of a declaration that it seemed to him, in his most honest judgment, urgent that negotiations be completed at a very early date so that a permanent settlement would be entered into before there is time for economic conditions to change for the worse in Poland, which he very much feared. I believe him to be entirely honest in this advice. I responded by saying that my personal judgment was—subject to correction by my superiors—that if the Polish Government put forward terms for the Stabilization Loan that created a complete identity of treatment for the holders of the dollar and sterling tranches, and as regards the other dollar loans stuck to their 4½ percent twenty-year offer, and perhaps sought some slight improvement of terms to the 8 percent Dillon Loan (on which the new interest was less than 65 percent of the original interest) that the Department would not press the Polish Government, although it would view with sincere regret the fact that the settlement would be less satisfactory to the holders of the various dollar loans than for the holders of the sterling (and dollar) tranche of the Stabilization Loan. I said this judgment would be [Page 640] influenced by the desire to recognize the endless effort made by the Polish Government, the knowledge that if it raised its 4½ percent offer it would be faced with the difficult (the Poles say impossible) problem of reconversion at home, and also the desire to get a swift and final disposition of this matter.

I emphasized, however, that as he knew the Council had an independent will and there was general likelihood they would press for still better terms.

The suggestion regarding possible differential treatment for the holders of the 8 percent Dillon Loan rose out of a hint Mr. Zoltowski himself gave me of his attitude.

  1. Reference is to the Republic of Poland 25-Year Sinking Fund External 8% Gold Bonds of 1925, issued through Dillon, Read and Company.