832.5151/1406: Telegram

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

204. Department’s 119, June 26, 7 p.m.

1. It is estimated that the 30% of exchange acquired by the Bank of Brazil at the official exchange rate which will approximate [Page 398] $75,000,000 annually has already produced $15,000,000. The present unexpended balance of the latter figure amounts to $2,373,000. About $50,000,000 may cover all the currently estimated annual official exchange requirements of the Government (Embassy’s telegram 113, April 12). The balance will be used as a working fund for the Bank of Brazil. Since the new exchange regime began the official exchange requirements of the Government have been averaging about $50,000,000 annually the balance has permitted the Bank of Brazil to check sharp breaks in exchange rates without entering the market as the largest buyer. When expedient the bank also draws on the balance to pay quotas of $360,000 daily (Embassy’s despatch No. 1396, June 2663).

Earning and interest transfers are not regularly made but the bank has in exceptional cases granted exchange for earnings and administrative expenses. In some instances it grants weekly quotas and when the amounts are small it sells exchange for the entire amount (Embassy’s despatch No. 1155 [1255], April 29 and telegram 159, May 1364). These remittances are made through the special free exchange market and not from the 30% fund of official exchange. The selling rate on the special free market is now 21 mil 850 reis plus a tax of 10%. The Bank of Brazil has sanctioned private transactions provided that the foreign exchange offered represents new capital for investment in Brazil. In such cases the bank receives 30% of the exchange at the official rate and imposes a remittance tax of 10%. Such transactions have been made recently at rates approximating 25 milreis for the 70%. The Director of Exchange informs me in confidence that the present tax of 10% on the special free market will shortly be reduced to 5%, also that commercial banks will be permitted to purchase personal checks not in excess of $500 each at the buying rate on the special free market. This will tend to restrict bootleg operations. The director States that commercial arrears of countries other than the United States and Germany for which exchange has not been closed amount to 15,522,640. He intends to expedite the liquidation of these arrears and when accomplished to inaugurate a plan of regular remittances of earnings and dividends. The delay in the liquidation of these arrears results from current negotiations with the Bank of Brazil for unfreezing agreements similar to the American agreements.

2. American commercial arrears have been cleared up although some of the drafts are still en route to the United States. Commercial payments are being made to Americans on a current basis. The director again informs me that a detailed statement of the settlement of American [Page 399] arrears as described in the second paragraph of your telegram will not be available for about 15 days because of the delay in receipt of information from banks in remote parts of the country (Embassy’s despatch No. 1339, June 2 and 1346, June 565).

3. On June 1 the Bank of Brazil’s “bought” position in compensation marks amounted to 3,400,000 compensation marks. During [apparent omission] German firms purchased approximately 36,000 metric tons of Sao Paulo cotton with the result that on June 29 the “bought” position reached 15,985,488 compensation marks (Embassy’s telegram 189, June 12 and despatch No. 1359, June 1265). The director informed me that the cotton will be exported in such a way as to allow the market to absorb the compensation marks and reduce the risk of the bank.

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