823.51/1210
The Ambassador in Peru (Steinhardt) to the Chief of the Division of the American Republics (Duggan)
Dear Laurence: During the past few days I have had several talks with Dr. Oreamuno,51 Mr. Roca52 and Mr. Heineman of the [Page 881] National City Bank, and have to report to you as follows with respect to the present status of the negotiations looking to the readjustment of the Peruvian Government dollar indebtedness.
Roca has proposed to Dr. Oreamuno a definitive readjustment along the following lines: The Peruvian Government will engage itself to appropriate annually the sum of S/. 10,000,000 which will have a guaranteed exchange value of $2,500,000; the payment of the two and one-half million dollars to be secured by what amounts to an assignment of the revenues arising out of oil taxes received from the International Petroleum Company,—which are unquestionably ample—to cover the payment of $2,500,000 per annum.
Roca’s plan provides, in substance, for a reduction of the principal face amount of the total indebtedness by roughly fifty percent; interest to be resumed at the rate of three percent per annum on the reduced face amount; the balance of the two and one-half million dollars to be applied to the amortization of the reduced debt over a period of twenty-five years by calling bonds by lot at par. He also intimated to Dr. Oreamuno that he was prepared to consider refunding the past due coupons. None of us are entirely clear as to whether he intends that the amortization of the refunding bonds must be provided for out of the two and one-half million dollar fund, or whether he is willing to make a modest additional appropriation therefor. It is my own opinion that he intends the amortization of any bonds issued to refund past due coupons to be included within the two and one-half million dollars, but he has expressed himself so vaguely on this point to everyone that none of us are sure of just what he has in mind.
Insofar as concerns the application of the proposed fund of two and one-half million dollars I understand that as many as six or eight different plans have been suggested and are under consideration. One favors a higher interest rate at the expense of amortization; another favors a more rapid amortization at the expense of interest payments; another proposes a smaller reduction in the principle of the indebtedness at the expense of amortization; still another contemplates the use of internal bonds—with a fixed rate of exchange—for the settlement of at least a part of the debt in order to avoid the proposed large reduction in principle.
All of the plans under discussion are predicated on the appropriation by the Peruvian Government of not more than $2,500,000 per annum for debt service.
Dr. Oreamuno appears convinced that $2,500,000 per annum is the maximum Roca will agree to set aside for the dollar bonds and does not believe that the President would consent to a larger amount, his approval of even $2,500,000 being doubtful. I may add that I [Page 882] entertain the same opinion. I understand that Oreamuno has reported to this effect to the Bondholders Committee and Protective Council in New York and has, in substance, recommended the acceptance of annual payments of $2,500,000 as the basis for formulating a mutually agreeable plan of readjustment. From what Dr. Oreamuno tells me, there appears to be some opposition in the Council to the acceptance of the amount proposed as the basis of negotiations.
On the assumption that it may be of interest to you to have the expression of my views for what they may be worth, I am setting them forth below:
No one who has not been on the ground here can possibly realize the difficulties with which we have been confronted in persuading the Peruvian Government to even consider substantial payments on the dollar bonds and the intensity of the efforts to coax them into increasing the original proposal from S/. 8,000,000 to what amounts to S/. 10,500,000 (a guarantee of $2,500,000 is equivalent to S/. 10,500,000 at the present rate of exchange).
The President is fundamentally and bitterly opposed to any payments on the dollar bonds, and has not yet formally approved of the proposal made by Roca. Incidentally the President is just as much opposed to the payment of foreign commercial debts and continues to withhold his approval of the Electric Boat payment.53 With the exception of Boca no one in authority is in the slightest degree interested in a readjustment of the country’s external indebtedness or, for that matter, in the country’s credit. Mr. Boca is about seventysix years of age and in poor health. He and the President are at the moment deadlocked on the payment to the Electric Boat Company and I should not be at all surprised were Roca to resign at any time on this issue, as he has passed his word to Mr. Sutphen54 and feels his personal honor is at stake. Should he die, be compelled to retire by ill health, or resign, the prospect of any payments in the immediate future will become nil. If, as is generally believed, Manuel Ugarteche is to be his successor, the possibility of a settlement will vanish. Only the long standing friendship between Roca and the President and the ability of the former to coerce the latter is likely to bring about the President’s reluctant acquiescence in the payments proposed by Roca.
If, as now seems likely, there is to be an election next year, the country will be thrown into turmoil and the foreign debt lost in the shuffle. Furthermore, if a plan is agreed upon and put into effect before the election, a presidential decree would be sufficient to make [Page 883] it operative. Any plan attempted to be consummated after the election of a congress would have to ride the violent opposition of a substantial body of public opinion which would be excuse enough for the Government to abandon the plan.
There are several important newspaper owners and editors opposed to any payments on the foreign debt. At present they are rigidly restricted by censorship. With a congress in session they would unquestionably support the inevitable attacks in congress on any plan. The disclosures before our Senate Investigating Committee of the commission paid to Juan Leguia55 are certain to be aired again and the hostility in many quarters to the Leguia regime will be used as a pretext for upsetting any plan that may have been agreed upon.
The economic condition of the country at the present time is relatively very good, but the drag from outside sources gives reason to believe that governmental revenues may begin to fall off by the end of this year. At the slightest indication of any marked decline in government revenues, no plan which is not in effect can be consummated, for the President—adamant on this subject—would seize upon such a decline as a pretext for refusing to go through with the settlement.
As I have said above, it is my considered judgment that at the present time the only individual in Peruvian public life who possesses the integrity of purpose, force of character and personal relationship with the President to successfully fight for and consummate any plan of readjustment is Roca. He is highly sensitive. Too much opposition or criticism from the Committee or Council may cause him to abandon his efforts on behalf of the bondholders. The President would welcome such a development and find justification therein for his position. I am convinced that on the withdrawal by Roca of his aggressive support any possibility of a settlement or increased payments will disappear and that it will be years before the subject can be revived. During the intervening period the bondholders will receive no interest and it is extremely doubtful that any plan formulated in the future will be of greater advantage to the security holders than that now proposed. I suggest that the bondholders will receive no interest, for if Roca’s proposal is finally rejected, such action will be seized upon as an excuse by the President for making no further payments.
A temporary arrangement on the terms outlined by Roca appears to be out of the question for he has made it unmistakably clear that [Page 884] unless a definitive agreement is arrived at he will not accept a temporary basis, and that if the amount proposed by him is not acceptable, no further payments of any kind will be made. The $500,000 set aside last year for amortization by purchases in the open market is about to be appropriated by the Government for other purposes. The excuse offered is that the Council objected to purchases in the open market at greatly depreciated prices.
I think I should tell you, in confidence, that the communications addressed during the past year by the Council to the Peruvian Government have had a very unfavorable effect on the President and Boca. They both very much resented the tone employed. Dr. Oreamuno will doubtless tell you more on this subject when he sees you.
Roca told Oreamuno that if his offer of $2,500,000 was accepted as the basis for formulating a plan, he would be willing to go to New York to discuss the details with the Committee and Council, but that unless he was assured the basis proposed by him was agreeable, he would not make the trip.
In conclusion, it is my opinion that the most recent proposal made by Roca is substantially the best that can be obtained and that if it is not accepted, the members of the Committee or Council who may cause its rejection must be prepared for a return to the status of total default with virtually no prospect of any payments to the bondholders for many years to come, and a grave doubt that any terms arrived at years hence will be of any greater advantage to the bondholders.
I do not say that the proposal now made is the best that could be made were the President not so bitterly opposed to any payments whatsoever. An additional $500,000 per annum could probably be squeezed out of the budget, but in view of the President’s determined opposition and the steadily increasing tension between Roca and himself by reason of the President’s opposition to the proposal as made, I am convinced that the present offer is substantially the best obtainable.
As I see it, the question is much less that of acceptance or refusal by the Committee and Council than whether Roca can force the President to go through with his plan should the Committee and Council accept. Thus far he has not been successful in the Electric Boat Company matter, which presents identically the same conflict of views—involves a much smaller amount of money, and presents stronger arguments in support of Boca’s position.
I understand that Dr. Oreamuno intends to make a further effort to win Roca’s consent to an additional future contingency payment, dependent upon an increase in government revenues. If he is successful in this respect or in obtaining a modest progressive increase for [Page 885] future years in the amount now proposed, I think he will have accomplished the maximum possible.
With kindest personal regards [etc.]
- J. Rafael Oreamuno, representative of the General Advisory Committee of Peruvian Bondholders.↩
- Benjamin Roca, Minister for Finance and Commerce.↩
- An agreement was reached later in May 1938 for the payment of the debt due the Electric Boat Co. for the construction of a naval base, four submarines, and a number of torpedoes (823.34/246, 247).↩
- Henry R. Sutphen, vice president of the Electric Boat Company.↩
- Son of Augusto B. Leguia, former President of Peru. For the relations of Juan Leguia with the Electric Boat Company contracts, see U. S. Congress, Senate, Hearings before the Special Committee Investigating the Munitions Industry, United States Senate, 73d Congress, pursuant to S. Res. 206, Part 1, September 4, 5 and 6, 1934, Electric Boat Co. (Washington, Government Printing Office, 1934), pp. 119, 130, 131, 132, 135.↩