821.51/2345
The Ambassador in Colombia ( Braden ) to the Secretary of State
[Received July 17.]
Sir: I have the honor to refer to my telegram No. 47 of July 11, 5 p.m., and to submit the following additional information on my [Page 485] conversations with the Colombian Minister of Finance on July 8 and 10:
1. The Minister asked what I thought of the Colombian memorandum as submitted to the Foreign Bondholders Protective Council, Inc. I told him my personal reaction thereto was that the Colombian argument frequently overshot the mark by attemping to prove too much; for instance, the statement that depreciation of the peso makes full renewal of the debt service “impossible” is an exaggeration, the word “difficult” would have been more accurate. Mr. White, I believed, had made some pertinent observations to Ambassador López with respect to the memorandum throughout over-emphasizing comparison of the country’s fiscal position between 1929 and 1938.
I said that, while admittedly it is extremely difficult, with statistics available, to make an accurate estimate for Colombia of the balance of payments and perhaps no two people would arrive at the same conclusion, nevertheless the memorandum’s arguments respecting balance of payments lose force in face of the fact, generally accepted in Bogota banking circles, that Colombia has had difficulty during the last month or so in keeping the value of the peso down. In this connection, I said I could not agree with the Colombian thesis of excluding all exports of petroleum, 40 percent of bananas, and platinum. While Mr. White is inaccurate when he says the exploitation of oil has been proceeding at a tremendous rate and that the first oil has been brought through the pipe line from the Barco concession during the last two or three months, the Colombians are equally in error when they exclude the substantial benefits to this country received from the Tropical Oil Company in wages, local purchases, taxes, etc., plus the few millions being spent annually on exploration. The Minister admitted that I was right but remarked that Tropical purchases in the country about balanced their local sales.
2. Dr. Lleras said, for a while, the peso had tended to rise against the dollar but now the reverse was true, as was proven by the recent drop in gold reserves to a ratio of 60 percent (60.52 percent as of June 27). The legal minimum was 50 percent, the banks had done little rediscounting but might do so at any time, in which event if exchange control had been removed the peso would be under severe pressure, at least for some months. He then made his suggestion regarding a stabilization loan from the Federal Reserve Bank, as described in my cable under reference. It may be observed that the recent drop in gold reserves is perennial and due to the off-season in coffee shipments; gold reserves as of July 8 are back to 62.7.
3. The Minister said he already had a project drafted looking to the removal of exchange control. In this connection he observed that Mr. White seemed to forget that the National Government could not agree to such a high rate of service as would absorb all available exchange and leave none for the service on loans by departmental and other debtors.
4. The Minister told me of a letter he had received from Ambassador López describing the conversation with Mr. White on June 16. This account approximately paralleled the memorandum enclosed with the Department’s instruction No. 51 of June 14, 1939.18
[Page 486]5. I told the Minister that the points raised by Mr. White which appealed to me were:
- (a)
- Discrimination as between external and internal bonds;
- (b)
- Percentage of budgets devoted by other countries to foreign debt service. I emphasized to him that even in Chile 22 percent of the 1938 budget had been paid to foreign bondholders;
- (c)
- The purchase of the Belgian Railroad.
6. On (a), Dr. Lleras held there had been no discrimination, since the internal loans had been contracted under duress, somfc of them even without any interest, and the largest one had been liquidated largely by means of a special tax on gasoline, which was oppressive and could not be continued for too long a period. Despite the Minister’s explanation, this tax still is effective and a fair guess is that it will be continued. He made no mention of Ambassador López’ suggestion that rate of interest on internal bonds be reduced to a figure proportionate to the external. Therefore, I inquired whether this had been considered. He replied affirmatively and said it had been done in the past by means of an arbitrary tax but he thought there were only one or two issues on which it could now be done and that it would do little good.
With respect to (b), the Minister offered no counter argument except that other essential items on the budget simply could not be cut nor eliminated to a degree which would permit of such high percentages as some other countries devoted to debt service. He had already cut next year’s budget by 30,000,000 pesos. In my opinion, it is perfectly true that this country could, at this particular juncture of its economic development, soundly and beneficially spend a budget augmented in this amount.
He said (c) the purchase of the Belgian Railroad was forced on the Government as otherwise operations thereof would have ceased and an impossible situation would have been created for the Government.
7. I inquired whether the Minister had further considered my purely personal suggestion (described in last paragraph of Page 9 of my despatch No. 117 of May 15, 1939)19 regarding an X percentage of the budget being allocated to foreign debt service. He replied that it would be impossible to apply an X percentage to the entire budget but it might be done with certain specific items of revenue and thus give the bondholders a chance for an increase in payments.
8. The Minister was pleased with the advance being made on the question of revenue cutters, appreciated the assistance already given in Washington, and hoped a satisfactory combined service for both coast guard and auxiliary naval defense would be consummated.
9. He regretted that the Export-Import Bank could not assist in the financing of the Agricultural Credit Bank but understood our position thereon.
10. My observations on the Colombian memorandum Dr. Lleras took in good stead as he did my remarks supporting certain of Mr. White’s arguments. In short, I think he genuinely desires a settlement but simply does not know how to overcome the practical and political obstacles which make it extremely difficult for the Santos administration appreciably to better the so-called “López terms.”
[Page 487]Pursuant to the Department’s instruction No. 44 of June 21, 193920 suggesting that I comment on Mr. White’s memorandum of June 9, 1939,20 there is little to add to the above other than to say that it contains several mistakes as for instance when he speaks of Colombian bonds selling on the New York market at 15 cents on the dollar, whereas the price on June 9 was actually 27½ with, a low for the year of 19¾. Also, Mr. White apparently confuses the balance of trade with the balance of payments. In this connection I enclose an analysis of the latter20 prepared by the National City Bank for 1937, which taken together with the estimate of the Colombian memorandum may give the Department a somewhat closer approximation to the real situation.
Of course an adequate discussion of the arguments by both sides on many phases of the situation is necessary. However, the whole situation has been pretty thoroughly examined during the last few years so that each party is already well acquainted with the other’s views. Hence it should now be possible to shorten the conversations which otherwise may be time-consuming and will not greatly clarify the issues since both will more or less rigidly adhere to their particular theses.
The one point, above all others, to which a solution must be found is how much can and will the Colombians increase their proposal above the so-called “López terms” stipulated in their memorandum and at what rate will the Foreign Bondholders Protective Council, Inc. give its approval to those terms. This is a question which it should be possible to settle within a few days at the most. It is generally admitted here that the Colombian offer of the “López terms” was made on a trading basis in order to bring forth a counter offer from the Council. The negotiation on this one point can be done back and forth across the table rapidly if the issue is not confused by such issues as Mr. White (bottom of Page 6 of his June 9 memorandum) insisting that the municipal and departmental debts be adjusted simultaneously with the national debt. In this connection I beg to refer to the last eight lines on page 5 of my despatch No. 117 of May 15, 193921 and to suggest that it would be advisable for Mr. White to urge that in all allotments of national income to subsidiary governmental units at least a portion be earmarked for foreign debt service.
I feel that the interests of the bondholders have already suffered because of the many avoidable delays permitted during the past couple of years. To allow further procrastination now would be inexcusable and will still more injure the bondholders.
Respectfully yours,