740.34112 RP/10
The Ambassador in Paraguay ( Frost ) to the Secretary of State
[Received April 3.]
Sir: I have the honor to inform the Department that on Tuesday, March 21, 1944, the Bank of the Republic, at a meeting of its Board of Directors, accepted a proposal dated March 15th, which had been, submitted by the Asunción branch of the Banco Germánico. In brief, the proposal was that the Banco Germánico, which for some months has been in financial difficulties, would be relieved of certain Paraguayan Government Treasury Letters which would be taken over by the Bank of the Republic of Paraguay. The proposal also presumed that certain deposits which the Bank of the Republic had maintained with the Banco Germánico and which had been refused repayment would also be liquidated. In this connection the Department is referred to the Embassy’s telegram No. 103, February 18, 3:00 p.m., 1944,68 and to the Embassy’s strictly confidential despatch No. 1836, dated February 21, 1944.
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The presentation and acceptance of this proposal by the Bank of the Republic was anticipated in the Embassy’s strictly confidential despatch No. 1836, under reference. In actual fact, the settlement of the account amounts to the Bank of the Republic’s being repaid its deposits with the Banco Germánico in the form of the Paraguayan Treasury Letters which the Banco Germánico has held for a period of some years (see Embassy’s despatch No. 858, dated March 15, 194368).
In the final analysis the Bank of the Republic has assumed an asset of questionable value as represented by the Government’s Treasury Letters and to the extent of the value of these Letters has further immobilized its own capital. The Banco Germánico on its part has managed to increase its liquid assets to the same extent, but even by this improvement in its cash position its balance sheet projected in the proposal submitted to the Bank of the Republic still shows a debit balance of 37,843 guaranies, or approximately $12,614.00 United States currency. From a purely statistical point of view the Banco Germánico is, therefore, still insolvent.
It is understood that the officials of the Bank of the Republic are again pressing the administration of the Banco Germánico in Buenos Aires through the Asunción branch for the physical payment of the bank’s capital into an account in Paraguay. It has been suggested [Page 1493] that, at least in theory, this purpose might be accomplished by the recognition under the heading of capital of the valuation of the Banco Germánico’s building which stands at 280,000 Argentine pesos, and the bank’s losses over the past five years which stand at approximately 120,000 Argentine pesos. In addition to these two items there would, accordingly, remain 600,000 Argentine pesos but this, at least so far, is still maintained by the parent organization in Buenos Aires as a credit entry in its books in favor of its Asunción branch. It is this capital item which the Bank of the Republic is attempting to have deposited in Paraguay proper, but, so far, these suggestions have been completely unsuccessful.
It is still an open question as to whether or not the Paraguayan Government will pursue this matter to a positive conclusion by liquidating the Banco Germánico in Asunción. The proposal which has been accepted has not to any degree changed the financial status of the Banco Germánico and it is very doubtful whether the responsible Paraguayan officials feel that this institution can now, or in the future, make any real contribution to the economic development of the country. Unfortunately, the officials of the Banco Germánico, some of whom are openly known and admitted to be aggressive and active Nazis, are said to be well connected particularly with the Paraguayan military, and it is problematical whether the Banco Germánico can be liquidated without its becoming a major political point of disputation. The Minister of Finance has three times assured me personally, the last time only today, that he is absolutely determined upon proceeding with the liquidation.
Several of the officials of the Bank of the Republic have admitted the fact that the Banco Germánico in Asunción has not only been guilty of loose financial practices but that it has, as well, prejudiced the interests of its Paraguayan depositors by making poorly secured or wholly unsecured loans and advances to German firms in this area which have, at times, found it unwise to invest real capital in Paraguay. One excellent case in point is Staudt & Company which has little capital of its own and is conducting a large business on the basis of an overdraft or open account with the Banco Germánico which amounts to 100,000 guaranies. Some conflict between these German interests would seem to be very much in evidence as it is known that the Banco Germánico has requested and demanded that Staudt reduce this overdraft but Staudt, in accordance with instructions received from its Buenos Aires headquarters, has refused to take such action.
The future course of the intervention of the Banco Germánico would appear to depend, at least to a certain extent, upon the promulgation of the new banking law of Paraguay which is expected to appear [Page 1494] within the next several months. It is reported that this law will require all banks to deliver their capital in Paraguay presumably either in the form of cash or in the form of negotiable securities. Whether the Buenos Aires officials of the Banco Germánico will be willing to take such a step is a matter of conjecture. The Finance Minister has definitely declared to me that the Paraguayan Government is pursuing a policy of attempting to compel the repatriation of as many of the assets of the Banco Germánico as is possible and that once the Banco Germánico and has been placed in a solvent position and its assets are under the control of the Paraguayan Government its liquidation will be ordered. The primary concern of the interventor and the officials of the Bank of the Republic has been the possibility of serious losses being visited upon Paraguayan depositors should the Banco Germánico be dissolved, and to a certain extent this difficulty may be solved within the next few weeks. However, as has been mentioned before, the actual liquidation of the Banco Germánico is a highly explosive political proposition and it would appear problematical whether the liquidation can be forced, as promised by Dr. Espinoza, while the political temper of the country remains as it is.
Respectfully yours,