The Secretary of State to the Ambassador in Brazil (Caffery)
38. Your 70, February 28. The background of the negotiations had been explained to the Council and was explained again this morning.
The suggestions made by the Department would not require a larger total debt outlay on the part of the Brazilian Government. They pivot around the idea of distributing more equitably the payments in prospect on securities of Grades I, II and III. In urging this upon the Brazilian Government, the Department is not seeking to add to Aranha’s difficulties; in a sense, it is trying to assure that the debt proposal would receive a satisfactory reception in the United States that would cause Aranha’s very-much-appreciated effort to have the satisfactory results he seeks.
The Department is wondering whether the distribution between Grades I, II and III as contemplated in the latest Brazilian proposal accounts for the comparatively responsive attitude of the European bondholders council group. Correspondingly, the Council here feels that the bondholders it represents are at a disadvantage.
The last paragraph of your 70 touches upon the underlying concern which the Department entertains. It has been aware of the possibility that the British Government would seek to negotiate a clearing agreement with Brazil on the basis of its increased war purchases. Such a British–Brazilian clearing agreement the Department might have to discuss with the British Government. However, if it should develop that such an agreement was connected with a debt plan that accorded more favorable comparative treatment to the holders of sterling bonds than to the holders of dollar bonds the reaction in this country would be critical and severe. It would be felt that Brazil was ignoring the commercial advantages possessed in the American market and the fact that these purchases created more exchange than is allocated here. There is little doubt that such a series of developments would lead to the impression that the general line of our good-neighbor policy was not effective in the face of diplomatic maneuvers of another sort.