The Secretary of State to the Ambassador in Costa Rica (Des Portes)

No. 490

Sir: The Department has observed that the Republic of Costa Rica is now in the third year of complete default upon its dollar bonds floated in the United States, after having serviced these obligations only in part in several years previously. Yet no steps have been taken by the Costa Rican Government to reach an agreement with the holders of these bonds which would be mutually satisfactory to both the debtor and the creditors. These facts are, of course, well known to the Embassy.

The Embassy is further cognizant of the Department’s belief that the best method of adjusting defaulted debt situations is through conversations between debtor Governments and representatives of the creditors. The Foreign Bondholders Protective Council is prepared to act in the latter capacity, so far as American holders of dollar bonds are concerned.

In the case of Costa Rica, the Department believes that the initiation of conversations between that Government and representatives of the Council, designed to arrive at a basis for resumption of service which would be fair to the bondholders and within the capacity of Costa Rica to carry out, would be most helpful in the adjustment of the situation.

The Embassy is therefore requested to indicate to the Costa Rican Government, orally and informally, the interest of the Department in this matter, and to express the Department’s hope that it may be possible for the Government of Costa Rica to suggest an early date upon which it would be prepared to enter into discussions with representatives of the bondholders for the purpose stated.

For the strictly confidential information of the Embassy, the Department would say that it is fully cognizant of the unsatisfactory budgetary situation existing in Costa Rica. Indeed, that very situation is one of the reasons for the Department’s concern. The Embassy [Page 883] will recall that the report of Mr. Ness, the Treasury representative who served for a time as financial adviser to the Costa Rican Government, showed that ordinary budgetary expenditures in 1942 were almost double these of 1938, while ordinary budgetary revenues were almost the same in the two years mentioned, and were greater in the intervening years. The figures for expenditures in 1942 and 1938, in millions of colones,2 were 57.3 and 29.7, and for revenues, 34.5 and 35.6. The trend of greatly increasing expenditures which characterized the budgetary operations between 1938 and 1942 cannot but be disquieting to bondholders who have received in those years very small or even no payments on their holdings. In view of the comparatively prosperous economic situation which has prevailed in Costa Rica, bondholders are at a loss to understand why the Republic’s financial affairs could not be so managed as to permit of more substantial payments. The Department’s present instruction, therefore, is designed to remind the Costa Rican Government of the fact that it has foreign dollar bonds which are in complete default, and to suggest that it make suitable preparation for resumption of service at an early date, to the extent that it can reasonably do so, in accordance with the reciprocal cooperation which characterizes inter-American relations.

Very truly yours,

For the Secretary of State:
Dean Acheson
  1. At the controlled rate, effective since 1939, 5.62 colones equaled one United States dollar. On the open market, the value of the colon fluctuated considerably during the war years.