The Ambassador in Colombia (Braden) to the Secretary of State

No. 222

Sir: I have the honor to refer to the Department’s telegram No. 66 of July 15, 5 p.m. and to report that pursuant to my request the Minister of Finance, Dr. Lleras Restrepo, received me yesterday afternoon and read to me a cable he had just had from the Colombian Ambassador in Washington.

[Page 489]

This message, although somewhat longer, approximated the information contained in the Department’s telegram under reference, except that the Ambassador interpreted Mr. White’s refusal to recommend the Colombian proposal to the Council’s Executive Committeee as a definite rejection thereof. He added that Mr. Laylin,24 who also was present at the meeting, inquired whether Mr. White would recommend a settlement on a 3½ percent basis. Mr. White said he would not and that moreover he objected to further questioning along this line since it would commit him—something he could not accept since he was acting without authority from the bondholders. The Ambassador quoted Mr. White as declaring that the Colombian offer was incommensurate with present capacity to pay and still more with future prospects. In this latter connection, he had particularly stressed the development by American capital of the petroleum industry in Colombia. Mr. Laylin’s inquiry regarding 3½ percent is, of course, significant.

Dr. Lleras said that he had been so discouraged by the Ambassador’s telegram as almost to reply that nothing else remained to be done with the Council and that the Colombian Government would seek other methods, than through that organization, of dealing with the bondholders. However, just then he received my request for an interview and he hoped I would have some more encouraging information.

The Minister said Mr. White’s rejection of the Colombian offer made it impossible for the Government to make another, i. e., presumably through the Foreign Bondholders Protective Council. Also it prevented his including any item for debt service in the budget since it would become generally known that the Colombian offer had been rejected. When I doubted this, he insisted that everything was known in Bogota within twenty-four hours, which, I must say, is largely true. He frankly expressed his discouragement because it was evidently impossible by the present method of negotiation to reach a conclusion since Mr. White “assumed the dual role of negotiator and non-negotiator, that is, he took all of the advantages of a negotiator but none of the obligations, which placed the Government at a serious disadvantage—it was futile to continue discussions with White”. I indicated that Mr. White had not “rejected” but merely “refused to approve”. But the Minister insisted another offer could not be made.

In reply to my question, Dr. Lleras stated that Mr. White’s suggestion to make the offer a temporary one for one year was utterly unacceptable. Also he had requested Ambassador López and his financial advisers to submit a plan looking to the refunding of Colombia’s [Page 490] internal issues. This they had done but the Minister was now satisfied that the thought of refunding internal issues should be abandoned.

The Minister asked what information I had. I replied that unfortunately it was similar but even more brief than his, although I was encouraged by one factor: I understood Mr. White was disposed perhaps to consider the possibility of making increases in debt service contingent on increases in the Colombian budget. I added that since the Minister thought it unwise to follow my suggestion (see Section 7, Page 5, of my despatch No. 206 of July 13, 1939) of an X percentage of the budget being assigned to debt service, he might do so with an X percentage of revenues (both royalties and taxes) received from the petroleum industry. I pointed out that, while large sums were being spent on exploration, there was as yet no guarantee that these operations would be successful nor that Colombia would receive any substantial additional income from this source. Nevertheless it was a possibility with which Mr. White was impressed, according to the Ambassador’s cable, and by such an arrangement the bondholders would receive a speculative fillip which might compensate thtoi for a somewhat lower return than otherwise they would be willing to accept, also it would answer Mr. White’s arguments respecting Colombia’s ability to augment future payments. The Minister estimated that approximately 12 to 14 percent of the revenues presently received from the oil industry are equivalent to 1 percent on the debt service. He calculated that the earmarking of 15 percent of oil revenues to debt service might in a few years give the bondholders a substantial increase in interest but felt in any case they should be limited to the 4½ percent rate received by the holders of Uruguayan securities. I replied that I could not discuss the details of such a plan and had merely stated my personal opinion as favoring it in principle. But he should bear in mind that the Uruguayan bondowners were assured of a minimum of 4½ percent and moreover had received interest at that rate for some time past; therefore, I felt if the Colombian bondholders were to be asked to take any less, they should be compensated by the possibility of receiving a higher rate if the oil industry developed as we all hoped it would. Also I could not believe he would encounter much opposition in Congress on such a plan because in the final analysis Colombia would benefit even more than the bondholders from the development of the petroleum industry since, aside from local wages and purchases, if his figure were taken, 85 percent of the additional government income would be retained here. Dr. Lleras was receptive to this idea, which may therefore be pursued to advantage by Mr. White.

Dr. Lleras went on to say that by law he was obliged to submit the budget to Congress within ten days from its opening. He was now [Page 491] estopped, as described above, from including an item for foreign debt service and if it were not in the budget it would be extremely difficult later to reopen the budget in order to insert a special appropriation.

I observed that, according to his statements and excepting for the possibility of an X percentage of petroleum revenues being assigned to the debt service, apparently an impasse had been reached. This gravely concerned me as being highly unfortunate both for Colombian good name and credit and for the bondholders. Therefore, pursuant to his suggestion of last week that imagination be used, I begged him to put on his thinking cap and exercise the maximum of imagination to resolve the impasse.

The Minister replied that in the final analysis Mr. White would be in none too good a position when it became known to the bondholders that he had rejected a Colombian offer without making any constructive counter suggestions. I warned the Minister he should not count on Mr. White’s being embarrassed thereby as it would only appear to the bondholders and in the financial press in the United States that Colombia had made an offer which had been refused approval by the Council because it was not commensurate with this country’s ability to pay and compared unfavorably with debt settlements reached with others. Dr. Lleras said a similar situation had existed respecting Chile’s unilateral offer but subsequently based on insignificant changes in the Chilean undertaking Mr. White had been forced to give his approval in order not to appear, alone, as disapproving the Chilean offer which the bondholders themselves were by then ready to accept. I again mentioned the fact that Chile in 1938 at least devoted 22 percent of its budget to foreign debt service, to which Dr. Lleras rejoined that as soon as the departments and other Colombian debtors began servicing their loans the percentage of total budgets would be comparable to Chile’s. I observed that this was perhaps a subject we could discuss more intelligently when we knew exactly what the total service was to be.

When I again insisted that the Minister make some suggestion as to how the present impasse might be solved, he replied that it would be helpful if he could obtain, in some way, an indication as to what interest rate would be approved by the Council. I said I did not see how this would greatly assist him since, judging by his remarks, he still seemed to be pretty far away in his ideas from a figure which the Council would approve.

At one point I inquired whether there would be any advantage in Ambassador López and Mr. White coming to Colombia since the members of the debt commission, and of the Senate and House Committees, and other influential people might thereby obtain a better understanding of the situation as it existed in the United States and in turn Mr. White would sense the atmosphere here. The Minister [Page 492] agreed my reasoning was sound but said there were other considerations why it would be unwise for the negotiations to be transferred to Bogota. While of course I did not mention it to the Minister, one disadvantage of negotiating in the States is illustrated by the fact that while Messrs. López and White continued to discuss the refunding of internal bonds that subject never was very seriously considered by the Government here.

While I am satisfied it would be extremely difficult for the Colombian Government to include the departmental, municipal and bank debts in a settlement along with the national debt, I nevertheless asked the Minister whether by doing so it would not be possible to make a proposal on better terms than the one already submitted. This suggestion he rejected.

It will be noted from the foregoing that so far about the only point which appears encouraging is the X percentage of petroleum revenues being assigned to debt service. Several times throughout the interview I emphasized that Colombia’s credit would be seriously damaged with consequent embarrassment to all concerned if the Government left matters in the present impasse. I believe the Minister was impressed by my argument, but unfortunately not enough so to induce him to make another offer on terms anywhere near acceptable to the Council. I would feel more sanguine about my possibly bringing the matter to the attention of President Santos had he not already admitted to me that he knew little about finance and relied entirely therefore on his Minister.

Our interview ended by my urging that Dr. Lleras give serious thought to the finding of a solution to the impasse and by his promising to call a special meeting of the Debt Commission this week to consider the situation, after which he would advise me of what conclusions had been reached by the Commission and himself.

I shall, of course, appreciate being informed promptly of Mr. White’s proposal, mentioned in the last paragraph of the Department’s telegram under reference. It may at least, I hope, be of such a nature as to silence Dr. Lleras’ criticism respecting Mr. White’s dual role. Of course the ideal would be for it to be along the same general lines as the Colombian offer and with an interest rate within trading range of the Colombian.

Respectfully yours,

Spruille Braden
  1. John G. Laylin, Washington attorney, acting as counsel to the Colombian Ambassador.