The Ambassador in Panama ( Dawson ) to the Secretary of State

No. 805

Sir: I have the honor to refer to the Department’s telegram No. 178 of November 30, 1940, directing me to discuss the Foreign Debt Readjustment Plan again orally and informally with President Arias setting forth the interest which the Department takes in the matter.

On receipt of the Department’s telegram, a note was addressed to the Foreign Office, in compliance with local protocol, requesting an audience with the President. As reported in my telegram No. 218 of today,41 President Arias received me on December 7. I enclose a, memorandum covering in detail that portion of our conversation which dealt with the Debt Readjustment Plan. As stated in my telegram, [Page 1098] it is my impression that as a result of my interview with the President the matter will receive further serious consideration within the next few days.

Respectfully yours,

William Dawson

Memorandum of Conversation Between President Arias and Ambassador Dawson, December 7, 1940

The conversation was in Spanish and in informing the President of the Department’s viewpoint I referred to notes which I had prepared along the lines of the Department’s telegram No. 178 of November 30.

I stated that the Department was seriously concerned lest the Readjustment Plan be defeated in case the Panamanian Government did not accede to the reduction recommended by the Financial Advisers in the percentage of bonds required to place it in effect; that the Advisers assured the Department that, if the reduction in question could be announced in the press, the plan would be accepted immediately by at least sixty-six per cent of the bondholders and probably more; that, as the President knew, a considerable number of bondholders were unable to deposit their holdings for reasons connected with the European war; and that, taking into account this and other circumstances, the Department felt that the percentage deposited showed that the plan had had a very favorable reception on the part of the bondholders. I pointed out that, if the plan were to fail, the immediate result would be a very confused situation and a series of lawsuits the duration of which could not be foreseen (I referred here briefly to litigation already pending); and that on the other hand the plan offered a unique opportunity to settle the debt definitively on favorable terms and to the immediate advantage of Panama’s credit and prestige. I added that in my opinion this would create an excellent impression and represent a success for the new administration.

Continuing, I said that the fact that the Government had granted two extensions was encouraging and evidenced a desire to reach a definitive settlement; but that this desire would prove ineffective unless the Government consented to the reduction of the percentage which was indispensable if the plan were to be placed in operation. I stated that, believing the matter to be one of real importance to Panama, the Department had instructed me to request an audience for the purpose of expressing to the President its great interest in the success of the plan and its belief that it should be brought to a favorable conclusion very soon. I added that the Department did not attempt to express any opinion as to technical details or changes which the Panamanian Government might wish to suggest. I concluded this [Page 1099] phase of my remarks by stating emphatically that the Department was sincerely interested in an early solution of the debt problem; that it considered that the present plan offered such a solution; that it knew of no other solution more satisfactory to the Government or to the bondholders; and that it saw clearly that the failure of the plan, after it had advanced so far, would entail unfortunate consequences.

At one point (just before I referred to the extensions already granted) the President interrupted me to say that he had never liked the plan and did not consider it advantageous, that it entailed undue expense for commissions and other items, that it would leave Panamá still in default as respects unassented bonds, and that it was his hope that in return for leases on the Río Hato and other tracts desired by the Army the Panamanian Government would receive such generous treatment from the United States as to permit it to settle its foreign debt in full and “clean the slate”. I asked his leave, before discussing these points, to complete my statement regarding the Department’s position. Having completed my statement, as set forth above, I reverted to the President’s objections to the plan. I said that, as respects commissions, the matter was one which could no doubt be discussed with Mr. Train, representing the Financial Advisers; that the same applied to any other changes which the Government might desire to suggest for the improvement of the plan from its standpoint; and that with regard to the unassented bonds I did not believe the Government’s concern justified since it was to be anticipated that, once the plan went into effect, the status of nonassenting holders would be relatively so much less favorable that they would presumably hasten to join up. (It may be noted that my statements in this connection were in line with conversations which I had had with Mr. Train who on the basis of his talks with the Secretary of Finance41a had foreseen the points which the President would raise.)

I took advantage of the President’s reference to compensation in return for leases (of tracts needed for defense purposes) to endeavor to ascertain what he had in mind and also for some further discussion of other details pertaining to the lease negotiations. This will be dealt with in a separate memorandum.42 With respect to his idea of linking this matter up with a debt settlement, I pointed out that in my opinion this was inadvisable. I said that the present settlement was a good one for Panamá and that it had been approved by the Council of Foreign Bondholders and accepted by a very substantial number of bondholders. I expressed the opinion that there was no occasion for Panamá to do anything more and that the best course for all concerned would be to bring the proposed plan to a successful conclusion [Page 1100] as promptly as possible. (While I did not so say to the President, I do not for a moment believe that the Panamanian Government would, when the time came, find it desirable or perhaps even feasible to use eventual rental funds for the purpose of offering bondholders terms more favorable than those already negotiated and accepted by the bondholders.)

In conclusion, I reiterated to the President the Department’s lively interest in the success of the present plan and in the speedy conclusion of a settlement. I said that the Department does not participate in negotiations and that the Embassy would not of course do so either. I said, however, that if my informal good offices could be of any assistance as respects the Government’s conversations with Mr. Train, I should be happy to help in any proper way. The President said that he and his advisers would proceed to give further study to the plan in the light of what I had said; and that some way might be found, as respects one or two points, of making it more acceptable from the Panamanian viewpoint. He left me with the impression that the matter is going to receive further serious consideration within the next few days. Incidentally, I pointed out to the President that any changes suggested should concern details only and should not affect the structure of the plan, since a change in structure would entail great delay and probably necessitate the issuance of a new prospectus. The President said that he fully appreciated this.

I may explain that the offer of my informal good offices was made in agreement with Mr. Train largely for the following reason: Mr. Train has been authorized to make certain changes which should, he believes, please the Panamanian Government. For the psychological effect, instead of proposing these changes immediately himself, he would like to see the situation develop in such a manner as to make it appear that the Panamanians have had the initiative and that the present administration can claim credit for having materially improved the plan of its predecessor.

William Dawson
  1. Not printed.
  2. Enrique Linares, Jr.
  3. Not printed.