832.51/1673: Telegram

The Ambassador in Brazil ( Caffery ) to the Secretary of State

456. Department’s telegrams 223, November 15, noon, and 235 December 12, 4 p.m., my despatch number 2224, December 15.36 I will review briefly below the debt situation.

As the Department is aware, on invitation from the Brazilian Government, representatives from the United States, English and French bondholders came here last August to begin debt negotiations; the war intervened; the United States representative returned to the United States; the other representatives remained here and continued negotiations (joined later by a Portuguese representative); these European representatives finally reached understandings with the Minister of Finance on the basis of which they could probably conclude an agreement acceptable to their principals. The Minister of Finance offered them a permanent settlement (of the total debt in all currencies) with annual service of 3,000,000 pounds sterling rising perhaps to 5 after a year or two. The Europeans were willing apparently to accept this figure on one basis or another.

They are not willing to accept lower terms than they were in August for two reasons: war conditions in their countries and the fact that their personal reputations as negotiators are at stake were they to leave empty handed after all these months here. They would prefer to have the above sum allotted to the Federal debt, ignoring for the present [Page 376] the State and municipal issues in which we are more interested, and persuaded the Minister to agree to this. At this juncture I took action last week to prevent either a settlement of the Federal debt alone or any other agreement with the Europeans prior to negotiating with us. The Europeans are, of course, continuing to urge an immediate settlement.

For some time the Minister of Finance has been desirous of our taking part in the negotiations (and now insistently so) but my hands were tied by Department’s telegram 223, of November 15, noon. In the meantime Aranha, as frequently reported, has been urging that a settlement should be made first with the Europeans and then he said a more favorable settlement could be made with us later.

If we are not going to negotiate until later and oppose any settlement before then I should like to make this clear to the Brazilian Government because the whole business is getting into a muddle.

The Minister for Foreign Affairs continues to urge us not to have anything to do with the Europeans … I have no doubt Aranha sincerely means this. However, it is my impression that once lower terms were accepted by the Europeans we would run into obvious practical difficulties in getting better terms for our bondholders for the Federal bonds at least: President Vargas says he is “interested in doing something for the Americans” but if faced with an European invoice on terms very favorable to Brazil he might readily adopt the position that we should be as easy on Brazil as they were (having in mind the fact that the public and particularly the army in general still do not see why the debt should be paid at all).

In view of their trade balances the Europeans are not in as strong a bargaining position as we are although they will use what pressure they can especially the fact that the English and French are now making considerable “war purchases” here. Were we to use real pressure we could either increase the above figures or obtain real preferential treatment; but this would be resented of course.

If we do wish to participate in the negotiations I should appreciate any instructions the Department may wish to give regarding constructive proposals—especially whether to propose maintenance of the relative status of the various issues in all currencies as defined in the Aranha plan. This would leave the total amount to be paid on the entire debt as the sole major matter for negotiation and determination.

To sum up, we cannot leave the situation as it now stands: we must either (a) negotiate ourselves or (b) attempt to stop all discussions between the Brazilians and the Europeans (this of course would be opposed by both those sides.)

Caffery
  1. Despatch No. 2224 not printed.