832.51/1673: Telegram
The Secretary of State to the Ambassador in Brazil (Caffery)
249. Your 456, December 28, 2 p.m. In view of Aranha’s statements last March we have proceeded with various phases of the cooperative arrangements in the belief that Brazil would fulfill its undertakings. Therefore we have confidently expected at least equal treatment with respect to debts. Public opinion here (of bondholders, the press and in Congress) has closely followed developments since the conversations, such as failure to resume service on July 1, the suspension of negotiations with the Council and the several operations of the Export-Import Bank which have favored Brazil more than any other American republic. The Department must therefore again emphasize the importance of avoiding any postponement or appearance of postponement of action on behalf of American bondholders in deference to European bondholders.
On the other hand the Department does not wish to take any action which will discourage the gratifying desire manifested by the Brazilian Government to reach a settlement and feels that this opportunity to further a prompt settlement for the holders of dollar bonds should not be lost.
The Department is consequently orally informing the British and French representatives (please see Department’s 235 of December 12, 4 p.m.) that this Government will actively support at Rio the interests of American bondholders, that it will not countenance any partial settlement favoring European bondholders at the expense of American bondholders, and that any agreement must make some provision for all dollar bonds.
You are therefore authorized in your discretion to participate informally and independently in debt discussions with the appropriate Brazilian authorities for the purpose of ascertaining what terms the Brazilians are prepared to offer.
If the Brazilian Government is prepared to enter into discussions of the dollar debt, as we greatly hope, the Department will give immediate consideration to the question of whether the Council can play a useful role in those discussions, and as to whether it should send a representative to Rio.
The basis of any terms must be comprehensive, i. e., there must be provision for all dollar bonds in some schedule similar to the Aranha plan. To leave the State and municipal debts in default—a condition created largely by the Brazilian control of exchange—while payments were being received by European bondholders on a large volume [Page 378] of securities would cause great dissatisfaction which would hinder us in all our dealings with Brazil in the economic and financial sphere.
The amounts currently discussed are small for such a settlement and the application of the proportions of the Aranha plan would result in payments on some categories so small as to defeat the purposes of a debt settlement. For this reason it might be difficult to conclude a permanent settlement at this time. You will in this connection recall that in the discussions with Aranha last February this point was brought up and his letter to the Secretary of State mentioned that a transitional arrangement would initially be adopted, to be followed, upon an improvement in Brazil’s foreign commerce, by an equitable and satisfactory permanent settlement. Our surmise is that a plan based on small payments would be far more likely to secure acceptance if placed on a temporary basis.