821.51/25548/9

Memorandum by the Adviser on Political Relations ( Duggan ) to the Under Secretary of State ( Welles )

Mr. Welles: Mr. Francis White told me yesterday that he thought there was adequate reason for the Department’s not supporting the Colombian Government in presenting to the bondholders the terms of settlement embodied in Decree No. 1388 of July 17, 194019 because those terms departed from the arrangement presented to Mr. Traphagen and the Colombian Ambassador in the conference that took place in your office with Mr. Jesse Jones and Mr. Bell on July 6. When asked to be more specific, he stated that the inclusion in the Decree of a provision authorizing the Government to postpone interest or amortization payments if “economic or fiscal conditions prevent the country from promptly and completely servicing the new issue, strictly for [Page 714] the time such an impossibility might exist” was a departure from the arrangement proposed, since it permitted the Government the advantage of suspending debt payments but gave the bondholders no corresponding advantage of increased debt payments in case Colombia’s financial position improved.

I have studied all of the documents in this matter. The terms of the settlement embodied in Decree No. 1388 correspond exactly with the terms that were finally evolved in the conference of July 6 in your office. In addition, the Colombian Government in Decree No. 1388 included the article referred to by Mr. White. It is my considered view that this provision in no way makes less advantageous from the standpoint of the bondholders the other provisions of the Decree. It is simply a statement in writing of what is the sovereign prerogative of every government, namely, to preserve and maintain the essential functions of government even though that may require the suspension of debt service. This is a thoroughly accepted principle. It was on this principle that all governments acted in suspending debt payments during the world depression. The Colombian Government has merely gone a step further and perhaps has been a little more honest in giving notice that if its economic position will not permit it proposes as long as those conditions exist to suspend interest or amortization payments.

I think it is urgent that action be taken to clarify the Colombian debt situation. A coupon is due on January 1 for which no provision has been made. The Colombian Government is prepared to go ahead with the permanent settlement as discussed in your office on July 6 and as embodied in Decree No. 1388, with the addition mentioned above. The Government would naturally like to have this offer recommended by the Council but it is not prepared to enter into negotiations with the Council, taking the view that there is nothing further to negotiate. If the Council will not recommend the debt proposal, then the Government would like this Government to issue the supporting statement which, you will recall, it was indicated this Government would do in the event that the Council would not support the settlement.

Despite Francis White’s decided opposition, I still think that it would be worth-while for yourself, Mr. Morgenthau, and Mr. Jones to spend an hour with Mr. Traphagen in an endeavor to secure his support of the formula.

I shall be glad to do whatever I can to be helpful, such as to prepare a memorandum on the situation for the use of Mr. Morgenthau and Mr. Jones, to go over the situation orally with them, and to set up a [Page 715] meeting with Mr. Traphagen, presumably in Mr. Morgenthau’s office.

I attach a copy of the letter of the Colombian Ambassador to you, dated July 18,20 informing you of the acceptance by his Government of the terms proposed in the conference on July 6; also, a copy of Decree No. 1388.

Laurence Duggan
  1. See despatch No. 877, July 26, from the Ambassador in Colombia, p. 712.
  2. Ante, p. 710.