The Secretary of State to the Ambassador in Brazil (Caffery)
36. We met with Francis White today and reviewed the status of the Brazilian debt offer. The Council is still of the judgment that the offer in its latest form is still not adequate and would afford comparatively greater consideration to the holders of sterling than to the holders of dollar bonds. White quite definitely is of the opinion that the Council could not make any positive recommendation to the bondholders.
The Department has fully explained to the Council that this offer is one that the Brazilian Government has shaped up itself and is not to be regarded as a negotiated settlement. It has explained why in its judgment there are strong reasons for regarding even a comparatively unsatisfactory offer as a step forward. Moved by these considerations it has said to the Council that if the Brazilian Government went forward with the offer, particularly if the Brazilian Government would improve its terms on the vital point explained below, it might consider requesting the Council to abstain from comment on the offer and merely state that it understood the offer to be the unilateral offer of the Brazilian Government and it would not undertake to advise the bondholders in regard to it. White stated that should we make any such request of the Council, he would discuss it with his Executive Committee; in that contingency the Department would use its best influence.
The prospective offer as it now stands has one leading feature certain to give rise to dissatisfaction and criticism in the United States. You are therefore requested to bring this aspect of the question before the Brazilian officials with emphasis and thoroughness and to continue your effort to secure a modification that will be more satisfactory. The Department has in mind the relative treatment of the securities in Grades I, II and III. You know of course the preponderant American [Page 575]interest in Grade III. It is felt that the proposed treatment of these grades is not in correspondence with the Underlying equities and that there is no basic reason for retaining them because they were established in the original Aranha plan. The securities in Grade III rest upon the full credit of the Brazilian Government besides possessing specific pledges in every instance. It is therefore most difficult to find justification for the markedly better terms offered the securities in Grades I and II. The extent of the comparative favor shown Grades I and II is borne out by the following calculations, the full weight of which is all the more clear since the Sao Paulo Coffee Realization Loan is only a State security and not one of the Federal Government. According to our calculations, 82 separate loan issues would be serviced under the plan. The principal of these 82 issues totals approximately $996,000,000. Of these, the Sao Paulo Coffee Realization Loan makes up $44,000,000 or approximately 4½ percent of the total principal of the bonds involved. Under the scheme of payment now proposed, however, these bonds would receive as interest and amortization approximately $3,200,000 out of a total service that would range in different years from approximately $16,000,000 to approximately $18,000,000. In other words, bonds making up 4.5 percent of the total principal would receive 20 percent of the total payments and of the foreign exchange provided. The American holders of Federal securities and of other Brazilian State securities are apt to believe this an overpaid position in comparison with the terms accorded to them.
The same conclusion is indicated when it is remembered that the prospective plan calls for the use in amortization of the securities placed in Grades I and II of approximately 22 percent of the total exchange to be remitted. These also go preponderantly to the holders of sterling securities.
The Department greatly hopes that the Brazilian Government will appreciate the clear advisability of modifying its offer to rectify this situation.
The whole offer would be certain of more satisfactory reception here if the Federal loans in Grade III received as good treatment as the Federal loans now in Grade I and if part of the funds now allocated for amortization in Grades I and II were distributed either as interest or amortization to include Grade III loans on terms not less favorable than those received by any Brazilian issue.
Finally, I believe that it would be preferable if the plan were for 3 years instead of 4, the annual scale of payment being modified so that the payment in the third year would be the same as now being discussed for the fourth year.