Memorandum by the Adviser, Office of Economic Affairs (Livesey)


Financial Misguidance by Fiscal Representative of El Salvador Loan

Mr. W. W. Renwick’s communications of about May 16, 1944,90 to the Salvadoran Minister of Finance concerning Decree No. 12 of April 13, 1944, are most extraordinary.

They are a reckless attack on the established and customary methods by which governments negotiate readjustments of service on their defaulted bonds. In them Mr. Renwick tells the Financial Minister that to carry through with utilization of these usual procedures as authorized by Decree No. 12 would be an indelible stain on the good name and credit of El Salvador and would close the gates of credit to El Salvador. These remarks, if true, would appear to be equally applicable to the numerous other governments which have negotiated adjustments with the Foreign Bondholders Protective Council of New York and the Council of the Corporation of Foreign Bondholders of London without these Councils having obtained legal powers to represent the bondholders similar to the powers granted the Bondholders Protective Committee for Republic of El Salvador by the deposit agreements which that Committee imposed upon holders of El Salvador bonds. The most recent case of such an adjustment is Brazil, in November 1943, the adjustment covering some $900,000,000 par value of bonds.91

The two Councils have had long negotiations with the Government of El Salvador and announced in March 1944 that when the Salvadoran Congress approved the terms on which agreement had been reached in these negotiations the Councils would recommend to holders of dollar bonds and to holders of sterling bonds respectively to accept the terms agreed on. Decree No. 12 refers to these negotiations and authorizes the proposal agreed on with the Councils. Whereupon Mr. Renwick attacks the decree by referring to it as a “unilateral proposal” or a “unilateral adjustment”.

It is with reference to the agreement negotiated by the Councils that Mr. Renwick writes the Finance Minister as follows:

“The proposal of a unilateral adjustment to the American bondholders, without giving the latter the opportunity of defending their rights, by means of representatives with sufficient power, whatever [Page 1123] may be the apparent advantages it offers momentarily, cannot fail in time to have serious repercussions on the good faith of the Government.” …92

“It would appear that the most serious difficulty of the recent proposal of adjustment has been its unilateral character, for which it has been harshly criticized in the financial reviews of the United States and in London.…92 the relatively simple arrangement recently proposed which, in reality, is not an adjustment at all because in its negotiation no representative of the bondholders has ever been heard or taken into consideration.”

“The imposition of a unilateral proposal on bondholders who acquired the obligations of the Republic in good faith would put an indelible blot on the good name and credit of the Republic. In 1936 in accord with the Republic and taking the circumstances into account, the bondholders almost unanimously (95%) granted their assent to the reduction of the service and of the interest rates; but if an arrangement is imposed on them unilaterally, the gates of credit will be closed in the future, except on terms perhaps more severe and burdensome than those of the 1922 contract.”

The course which Mr. Renwick recommends as a substitute for Decree No. 12 is the following:

“If the Government were now to invite the bondholders to form a committee, it is reasonable to expect a comprehending attitude on the part of the bondholders towards the Government’s position, and it may be anticipated that there would be no difficulty in reaching a just arrangement satisfactory to both parties.”

Mr. Renwick thus recommends that instead of carrying out the agreement negotiated with the two Councils, the Government of El Salvador should invite the bondholders to form a committee to negotiate new terms. In so recommending, he differs from the Committee93 which negotiated the previous agreements with El Salvador and which, by virtue of deposit agreements with 95% of the bondholders, had power to act legally for the bondholders. In its announcement of March 29, 194394 to bondholders, terminating its own existence, that Committee said:

“The Committee has given thought to an appropriate and reliable channel of communication, to which the bondholders could turn for information after the Committee dissolves, and in consequence has discussed the matter with the Foreign Bondholders Protective Council, Inc., 90 Broad Street, New York, N. Y. This non-profit organization, formed in 1933 at the request of the Secretary of State, the Secretary of the Treasury, and the Chairman of the Federal Trade Commission, has been instrumental in negotiating settlements for bondholders in a number of foreign default situations. It does not accept custody or deposit of bonds. In case of permanent adjustments [Page 1124] which result in offers of debt service considered fair and equitable to the bondholders, a contribution of $1.25 per $1,000 bond is usually requested.

“As a result of our conversations, the Foreign Bondholders Protective Council, Inc., has indicated its willingness to include all the El Salvador dollar bonds in its field of activities and will advise the former depositing holders of Salvador bonds of any important development affecting their interests of which the Foreign Bondholders Protective Council, Inc. has knowledge and of which, in its judgment, the bondholders should be informed. It should be clearly understood that this involves no obligation either on the part of the Foreign Bondholders Protective Council, Inc. or on the part of the Salvadore bondholders.”

. . . . . . . . . . . . . .

Since the incorporation of the Council in 1933, the formation of bondholder committees has practically ceased, and the committees then existing have dissolved. Mr. Renwick’s appeal is for a return to an old regime which appears to have been effectively replaced by the regime against which he protests. Washington observers know of no basis for his statement that there has been harsh criticism in the financial reviews of the United States and in London of the recourse of El Salvador to the procedure of negotiation with the Council, nor has such criticism of the terms themselves been observed.

  1. Copies in Spanish of the two memoranda were transmitted to the Department by Ambassador Thurston in his despatch 1599, May 20, 1944; none printed.
  2. For correspondence on this adjustment, see Foreign Relations, 1943, vol. v, pp. 765 ff.
  3. Omission indicated in the original memorandum.
  4. Omission indicated in the original memorandum.
  5. Bondholders’ Protective Committee for the Bonds of the Republic of El Salvador.
  6. Not printed.