The Acting Chairman of the Bondholders Protective Committee for Republic of El Salvador (Hebard) to the Under Secretary of State (Welles)

Dear Mr. Welles: I regret the necessity of addressing you on the matter of the Committee’s present fear that the Government of El Salvador will default on the July 1st service requirements of its external debt as provided for in the Readjustment Agreement of 1936. There are enclosed herewith copies of the Committee’s letter of May 27th and its cable of June 10th8 addressed to Dr. Samayoa, Minister of [Page 567] Hacienda, which will be found informative regarding the Committee’s recent activities in relation to this matter.

The holders of Salvador bonds made very substantial sacrifices in their acceptance of the Readjustment Agreement of 1936 by the terms of which the service requirements of the debt were reduced from $1,736,941 to $850,000 per annum. The fairness and equity of the Agreement was recognized by the Government of Salvador.

Both the Committee and the Council of the Corporation of Foreign Bondholders in London, have closely followed developments in the Salvador financial and economic situation since November 1937, at which time the Government of Salvador announced temporary suspension of debt service to follow January 1, 1938 payments.

For the first five months of 1938 customs receipts by which these loans are guaranteed were approximately $460,000 in excess of those collected for the same period in 1936. This is important when it is recalled that it was during the spring of 1936 that the Readjustment Agreement was formulated, and undoubtedly customs receipts as then collected were considered by Government as adequate to cover loan service, and in fact no difficulty whatsoever was experienced by Government at that time in remitting not only the service of the loan for first six months of 1936 but also additional sums for past due coupons, amounting in all to $1,300,000.

We are reliably informed that on May 31st the Government had to its credit in the Central Reserve Bank 3,574,000 colones or the equivalent of $1,429,600; manifestly an exceptionally strong position. Debt service requirements due and payable on July 1st amount to only $467,500. The Government, therefore, is in most favorable position to cover July 1st requirements of the external debt without impairing its cash position.

The Committee and the Council of the Corporation of Foreign Bondholders, therefore, feel very strongly that there is no justification whatever for the Government of El Salvador failing to meet July 1st requirements and that its capacity to pay the amount in question cannot be honestly or fairly denied.

The Committee has enjoyed pleasant and satisfactory relations with the Government of Salvador but the scope of its activities and efforts in advancing the interests of the bondholders in the present situation are necessarily limited. The Department of State has on previous occasions rendered substantial service to the bondholders in the long and arduous negotiations between the Committee and the Government which were brought to a successful conclusion by the signing of the Readjustment Agreement.

In response to our protests against suspension of loan service in November last, we received an official letter from the Minister of Finance [Page 568] dated December 7th, containing the assurance that any suspension of remittances would be only temporary, and that remittances would be resumed as soon as circumstances might permit.

As we understand the present situation, the Government has not yet reached a final decision as to whether or not remittance should be made in time to meet the service due on July 1st next but is inclining toward taking a decision unfavorable to the bondholders.

The Committee is further informed from reliable sources that the Government is giving serious consideration to the expenditure of large sums on munitions of Italian manufacture; this, notwithstanding the fact that no enemy is threatening Salvador, or is likely to endanger its present secure position.

In this situation and at this time it is the carefully considered judgment of the Committee that the Department of State could render a most important service to the 4000 bondholders whom it represents in urging the Government of El Salvador to remit funds covering the July 1st requirements and thus avoiding a default which is unnecessary and unwarranted.

The Committee, therefore, earnestly and respectfully requests that the Department give favorable consideration to taking appropriate action on this matter in the interests of the holders of these bonds, and the continuance of the friendly relations heretofore existing between the parties concerned.

The Committee will welcome the opportunity to furnish you with any further information on any phase of the matter at issue.

With tokens [etc.]

For the Committee:
R. W. Hebard
  1. Neither printed.