The Ambassador in El Salvador ( Thurston ) to the Secretary of State
[Received September 5.]
Sir: I have the honor to review at this time recent developments concerning the prospective renewal of service on El Salvador’s external debt, as they are known to the Embassy from conversations with Mr. V. Manuel Valdés, who has just returned from Washington. [Page 1128] The Embassy has received from Mr. Valdés a draft copy of the Offer which the Salvadoran Government will soon make to American and British bondholder. It is understood that the Department also has this document.3
Mr. Valdés has presented the Offer to the Minister of Finance, and he hopes that it will be submitted to the National Legislative Assembly, which convenes today in special session, as soon as possible. According to Mr. Valdés, the attorneys in Washington employed by the Salvadoran Government expressed the opinion that the Offer in its final form should be submitted to the Salvadoran legislature for approval in advance of its public announcement. It is expected that the National Legislative Assembly will be in session for the next ten days and that this matter will be given consideration during that time.
Following approval of the Offer by the National Legislative Assembly, it is understood that the Government will issue a letter of appointment naming the Central Reserve Bank of El Salvador as its fiscal agent (on a non-profit basis) to handle service on the debt, and that the Bank in turn will appoint the National City Bank of New York as its representative in the United States for the same purpose. All preliminary arrangements have been made concerning these appointments. By the end of September or in early October it is expected that a public announcement of the Offer will be made, after its approval by the Securities Exchange Commission. It is said that the Offer has already been approved by the New York Stock Exchange, on which the Salvadoran bonds will henceforth be listed.
Mr. Valdés states that the Salvadoran Government has already begun the amortization of its bonds, within the terms of the new Offer, and that a total of very close to $225,000 has been expended since May, 1944 for their retirement.
It is further understood that the Salvadoran Government has transferred sufficient funds to the Central Reserve Bank to meet the interest payments due on July 1, 1944, and most of the funds needed to pay the January 1, 1945, coupons. The Central Reserve Bank in turn has transmitted these funds to the National City Bank of New York and to the Bank of London and South America, Ltd., in London. As the Department is aware, the Foreign Bondholders’ Protective Council of New York, the National City Bank and the Salvadoran representatives then in Washington agreed that it would be most difficult and perhaps illegal to make the July 1, 1944, interest payment at that time, and that it would be preferable not to disrupt negotiations leading to the new Offer in order to make the payment.
The transmission of funds to New York and London for payment of the July 1, 1944, interest coupons was made pursuant to Legislative [Page 1129] Decree No. 69 of June 19, 1944, published in the Diario Oficial on June 27 and transmitted to the Department by despatch No. 1768 dated June 28, 1944.4 In its despatch the Embassy stated that “This action is of little importance other than as an administrative arrangement”, believing that the Decree simply authorized the Salvadoran Treasury to transfer funds to the Central Reserve Bank in an amount sufficient to meet subsequent interest payments. It is now clear, however, that the Salvadoran Government intended by this Decree to renew service immediately as an indication of good faith. The National City Bank, for its part, is said to have stated that this Decree would appear to permit payment of the July 1, 1944, interest coupons only within the terms of the Offer, and that service could not therefore be resumed until the Offer was definitely made.
According to Mr. Valdés’ figures, the Salvadoran Government will make payments during 1944 totalling at least $1,076,863.19, of which $800,000 constitutes the regular Service and Sinking Fund under the Offer (including the $225,000 already spent for amortization) and the remaining $276,863.19 represents payments which will be made to bondholders who did not agree to the 1933 and 1936 readjustments and to holders of scrip.
It is said that the Manufacturer’s Trust Company of New York still holds close to $127,000 of Salvadoran funds entrusted to it as Fiscal Agent under the previous arrangements, and that the release of this money may be dependent upon legal action.