838.51/3525

The Secretary of State to the Minister in Haiti (Mayer)

No. 9

Sir: The Department refers to its telegram no. 182 [82] of December 24, 1 p.m., and to your telegram in reply no. 167 of December 27, 12, noon, regarding the difficult financial situation in Haiti.

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 [Page 577]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.

There is also enclosed a copy of a memorandum of December 29,9 from the Legal Adviser’s office of the Department relative to the effect of the signature of the proposed new Accord upon the responsibility of the Fiscal Representative as respects the bondholders in the event of the signature of the proposed Accord. As you will note, the suggested additional paragraphs contained in this memorandum have already been incorporated in the memorandum of December 30. This memorandum also contains an opinion with respect to the responsibility [Page 578]of the Fiscal Agent under the loan contract should the Haitian Government default wholly or in part on its amortization payments.

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.

Very truly yours,

For the Secretary of State:
Sumner Welles
[Enclosure]

Memorandum by Mr. Selden Chapin of the Division of the American Republics to the Under Secretary of State (Welles)

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.

S[elden] C[hapin]
  1. Not attached to file copy of this document.
  2. Not printed.
  3. Division of the American Republics.
  4. Not found in Department files.
  5. Laurence Duggan, Chief of the Division of the American Republics.