The Secretary of State to the Ambassador in Brazil (Caffery)
14. Your 30, January 19. The Brazilian Government is of course acting on its own responsibility and this Department does not want [Page 563] to be in a position of definitely standing in the way of any offer that it wishes to put before those who hold its dollar bonds. However because of the fact that a satisfactory settlement would create the basis for so much mutually beneficial future development between the two countries and on the contrary one that seemed to the bondholders unreasonably harsh would stand as an obstacle to such development, we think it desirable that you should put before the Minister of Finance our estimation of the offer which he is considering making. For this purpose it is believed that you should see the Minister of Finance personally before the 23d.
The offer based on the first year of the Aranha Plan would mean 17½ percent of coupon rate for holders of bonds in Grade III, Federal Loans, 10 percent for holders of bonds in Grade VI, the securities of the important Brazilian States, and 8¾ percent for holders of Grade VII, securities of big municipalities and some other States of Brazil. Even though they may have pretty clear recognition of the fact that the Brazilian economy is facing many difficulties and obstacles and that the problem of securing exchange for the service of debts is not an easy one, it is unlikely that the holders of these securities will feel satisfied with this offer. Many of them might accept it but our best judgment is it would not create a prospect by which American private capital would feel any assurance for further undertakings in Brazil.
The three grades cited are those in which the American holdings are most substantial. This offer would therefore be open to the criticism that it extends decidedly more favorable treatment to the European bondholders than to the main classes of American bondholders. For example, a holder of a Federal bond in Grade III, to which the full credit of the Brazilian Government was pledged, would find himself receiving less than one-fifth of the contractual interest, while European holders of Grades I and II would be getting full one-half. We feel that this distribution of payment would be all the more certain to be in the forefront of discussion here because of the fact that American purchases of Brazilian products create so large a part of the exchange for all of the bond payment.
It is realized that it is important for Brazil to have the prospect of a substantial and comparatively rapid reduction of its debt. However, when the method envisaged in paragraph 6 of Article I is used in connection with bonds being serviced at so low a percentage of their coupon rate as Grades III to VIII would be if the schedules of the first year of the Aranha Plan were applied, criticism might well again be invited.
In the light of all the foregoing (and it is our most earnest desire that the disposal of the bond question be such as to restore firmly the basis of financial operations between Brazil and America) we greatly hope that the Minister of Finance will use instead as the basis of his [Page 564] offer the fourth year of the Aranha Plan which yields distinctly improved percentages to the holders of Grades III to VIII and thereby also lessens the difference in treatment between the main American interests concerned and the main European interests concerned.
In handling this presentation you will, of course, avoid any possible attempt by the Minister to use our observations as justification for doing nothing.