In the course of recent conversations between officers of the Department
and the Fiscal Representative, Mr. Sidney de la Rue, this situation was
discussed at length. The Department is in agreement with the Fiscal
Representative’s opinion that it is now evident that the Haitian
Government will in fact be unable to maintain the complete
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contractual service on the two
remaining series of the 1922 loan if the essential services of
government are to be maintained in Haiti. The Department believes that
the best ultimate protection for the bondholders is the maintenance of
such orderly government in Haiti. The Department believes, furthermore,
that in view of the fact that the amortization schedule of the 1922
loans had been advanced to a point where the loan in normal
circumstances would have been retired in 1943, or approximately nine
years before its contractual due date, that the most equitable
arrangement for the bondholders would be a temporary partial default in
the present amortization schedule.
Accordingly, efforts have been directed towards the elaboration of a plan
which would permit Haiti to make such a default with the least temporary
dislocation of the existing financial structure, with the least
prejudice to the rights of the bondholders, and with the least damage to
the financial credit of the Haitian Government. There is enclosed a copy
of a memorandum of December 30, which contains the substance of the
views of the Department in this matter, and which suggests a procedure
for effecting the proposed default in contractual amortization. There is
also enclosed a draft of a proposed Accord8 to be signed by
you and a plenipotentiary to be designated by the Haitian Government,
modifying for the balance of the current fiscal year the Accord of
August 7, 1933.
Mr. de la Rue is thoroughly familiar with the Department’s views on the
prospective default in amortization and has assured the Department of
his readiness to cooperate by assisting the Haitian Government in
drafting the proposed basic note mentioned on page three of the enclosed
memorandum. In view of the urgency of the matter, since it seems
unlikely from Mr. de la Rue’s statements, that the Government of Haiti
will be able to meet the amortization installment due January 15 and
still conserve enough cash in the Treasury to meet its budgetary payroll
at the end of January, the need for prompt action is apparent. You are
authorized, accordingly, to enter immediately into such conversations as
may be initiated by the appropriate officials of the Haitian Government
in order to reach agreement on the text of the notes to be exchanged and
the Accord to be signed.
Please forward as soon as possible by air mail the text of the proposed
Haitian note. In the event that the text appears to be substantially
satisfactory the Department will notify you by cable of such changes if
any as may seem desirable and will authorize you to sign the
agreement.
[Enclosure]
Memorandum by Mr. Selden
Chapin of the Division of the American Republics
to the Under Secretary of State (Welles)
[Washington,] December 30,
1937.
Mr. Welles: With reference to RA’s10 memorandum of December 22,11 it has,
unfortunately, become increasingly evident that due to the grave
financial situation in Haiti, the Haitian Government will in fact be
unable to maintain the complete contractual service on the two
remaining series of the 1922 loan and will be obliged to default
temporarily on at least part of the contractual amortization
payments of the loan.
Sufficient funds to pay interest up through the April 15 coupon are
already in the hands of the Fiscal Agent, the National City Bank of
New York, New York City. The three contractual amortization payments
on the A and C series were made for October, November and December,
1937, a total of $296,250 on the A loan, and a total of $49,043.76
on the C loan, being a grand total of $345,293.76. This would leave
outstanding in round sums, including both A and C series,
approximately $8,000,000. The series B loan was retired early in
1937.
Mr. de la Rue states, however, that it is probable that if the
January amortization installment is paid over on its due date,
January 15, 1938, that there will not be sufficient funds to meet
all the salaries and current expenses set forth in the budget of
expenditures for the maintenance of the essential services of
government in Haiti. He anticipates, therefore, a demand by the
Haitian President that a reduction in debt service be made and that
that reduction be made effective in advance of the January 15th
payment.
At a meeting Tuesday afternoon with Mr. Welles, Mr. Duggan,12 Mr. Chapin, and Mr. de la Rue,
Mr. Welles stated, after hearing Mr.
[Page 579]
de la Rue’s exposition on the situation, that
it was obvious that the best ultimate protection for the bondholders
was the maintenance of orderly government in Haiti. This in turn is
predicated upon the continuation and functioning of the essential
services. He said, therefore, that he believed that we should be
prepared to accept the situation and to concur in a default in
amortization for the remainder of the current Haitian fiscal year,
the situation to be reexamined prior to the expiration of that
period.
Several important considerations were raised and discussed at the
meeting with regard to the form that this default should take. It
was decided that whatever steps are taken to meet the existing and
presumably temporary emergency should be so arranged that the
existing financial structure would be disturbed as little as
possible with a view to a return to the present arrangements at the
earliest permissible date. The legal position of the Fiscal
Representative and his office under the accord of August 7, 1933,
particularly articles 11, 12, 14, 15, 16, and 17, as well as under
the loan agreements, was also discussed.
The following procedure was tentatively agreed upon:
The Haitian Government will present a note to the American Legation
in Port-au-Prince outlining the difficult financial situation which
Haiti now faces, due to forces beyond its control, and
substantiating this statement presumably with a factual memorandum
on the economic and financial situation from the office of the
Fiscal Representative.
The Haitian Government in this note would ask for recognition of the
existing emergency and call attention to the fact that in the
circumstances in order to maintain the essential government
services, without which there might result political and financial
chaos, it had no alternative but to default on a portion of the
amortization service. The Haitian Government would reaffirm its
intentions of honoring strictly all its financial obligations and
its desire to maintain its credit standing. The Haitian Government
would state its intention to continue to pay the interest on all
outstanding bonds in full and, as a token of its intention to honor
its obligations in full, would continue, moreover, to make small
regular payments to the sinking fund. The amount of these token
payments will be determined in the note from the estimates submitted
by Mr. de la Rue upon his return to Haiti. The note would suggest,
therefore, the conclusion of a further agreement, or accord,
effective for the balance of the current fiscal year which would
contain the necessary provisions to permit the payment only of
interest and a small amount for amortization, and which would
suspend for the remaining part of the current fiscal year all
provisions of the Accord of August 7, 1933, which are inconsistent
with the new agreement.
[Page 580]
In as much as certain duties and obligations of the Fiscal
Representative are fixed by the provisions of Articles VI and IX of
the Loan Contracts, the Haitian Government should state in the note
that it will bring about a suspension for the balance of the current
fiscal year of the obligations of the Fiscal Representative under
such articles and instead thereof authorize for the corresponding
period the Fiscal Representative to set aside from the hypothecated
revenues the sums required to be remitted for the payment of
interest on the bonds and for a small token payment into the sinking
fund and to remit the same to the Fiscal Agent at the times and in
the manner provided in the loan contracts and in the bonds.
The Haitian Government in its note would undertake, moreover, to
guarantee that there would be no increase in salaries or allowances
paid to Haitian Government officials and employees during the period
of the default in amortization. The Haitian Government would also
undertake that in the event of a substantial increase of revenues,
no increase in the ordinary or general budget would be authorized
until the contractual amortization payment service had been resumed
in full. It would further undertake that extraordinary
appropriations outside of the general budget should be restricted to
emergencies duly recognized as such in accord with the Fiscal
Representative during this period.
In acknowledging the note, the American Minister would inform the
Haitian Minister for Foreign Affairs that pursuant to instructions
from his Government he was prepared to accept the draft of the
agreement suggested by the Haitian Government and to sign this
agreement without delay. The Minister would likewise in his reply to
the Haitian Minister for Foreign Affairs state that his Government
took due note of the intention of the Haitian Government to suspend
for the balance of the current fiscal year the obligations of the
Fiscal Representative under Articles VI and IX of the Loan Contracts
of 1922, and instead thereof to authorize him to set aside from the
hypothecated revenues the sums required to be remitted for the
payment of interest on the bonds and for a small token payment into
the sinking fund, and to remit the same to the Fiscal Agent at the
times and in the manner provided in the Loan Agreements and in the
bonds.
In view of the impending arrival in the United States on his return
to Haiti of M. Georges Léger, Haitian Minister for Foreign Affairs
and for Finance, it is possible that his services may be utilized by
the Haitian Government in approaching the National City Bank of New
York as fiscal agents for the loan with this plan. Should the Fiscal
Agent concur in substance with the request of the Haitian
Government, it may be possible further that with the assistance of
Mr. W. W. Lancaster of General Counsel for the National City Bank,
Mr. Léger may then approach the Foreign Bondholders Protective
[Page 581]
Council to lay before them
the difficult financial situation of Haiti and the procedure
envisaged by the Haitian Government along lines generally set forth
in the memorandum above.
