The Ambassador in Chile ( Bowers ) to the Secretary of State

No. 12,368

Sir: I have the honor to refer to my Airgram No. A–306 of June 20, 1945,55 in which is was reported that Sr. Alfonso Fernández, Manager [Page 810] of the Caja de Amortización (the Government’s debt-service agency) had indicated the possibility that the Chilean authorities may be considering a new debt-composition offer to foreign bondholders, presumably involving the writing down of principal and the fixing of revised rates of interest.

The statements by Sr. Fernández which served as the basis for this report were made in an informal interview on June 20 with Messrs. Clarence C. Brooks, then Economic Counselor of the Embassy, and Charles F. Baldwin, now Commercial Attaché. During the conversation Sr. Fernández asked his callers “what they would think” of an offer by Chile to revise its present external national debt with a view to bringing it more into line with the country’s actual financial and economic resources than it is at present. His remarks during the brief discussion which followed were so phrased as to leave it uncertain whether he was simply turning the idea over in his own mind, or whether the Government might now be considering such a move.

This aspect of Chile’s financial situation was the subject of two despatches from the Embassy last year—No. 9003 of March 2, 1944, and 9094 of March 10, 1944, both entitled “Chile’s Attitude Towards Payment of External Debt,56 (file no. 851 Foreign Debt). Both of these previous reports were also based on conversations between Sr. Fernández and officers of the Embassy. It will be recalled that at that time Sr. Fernández expressed his personal belief that full service of the external debt was impossible. Although it was true that Chile had made a good deal of money out of wartime exports of strategic materials, he maintained that these savings were sufficient to meet only a part of the demand which had been accumulated during the war for essential imports, such as machinery, transportation equipment, and raw materials, which the country needed if it were to progress economically. Articles published in the foreign press calling attention to Chile’s large exports of copper and other materials and the consequent inflow of foreign exchange, and at the same time criticizing Chile for its failure to apply these funds to debt service, showed a complete lack of understanding of the country’s real situation, he said. Convinced that Chile’s “normal” balance of payments position is preponderantly unfavorable, he maintained that the country simply could not afford to service fully an external debt the face value of which is equivalent to nearly US$350 millions.

The determination of Chile’s real and prospective ability to service its foreign debt would obviously require a detailed analysis of the country’s whole economy and its relations with other countries—a technical undertaking which would hardly be warranted until the matter [Page 811] reaches a less nebulous state than it occupies at present. Nevertheless, the presentation of certain background statistics and a tentative discussion of some of the considerations involved may not be amiss at this time. Sr. Fernández intends to visit both the United States and England this autumn, and the subject of the external debt might possibly arise during the talks which he undoubtedly will have in Washington.

[Here follows considerable detail on Chile’s general financial condition and needs. Among other factors, Ambassador Bowers points out that the country’s external debt as of December 31, 1944, in dollars sterling and Swiss francs, equalled approximately $348,000,000; that rather large amounts of income had been ear-marked for internal needs; and that Chile was desirous of obtaining external assistance and investment for internal development purposes.]

Thus the real problem at present involves much more than the existing external debt. If Chile is to obtain the new funds which it desires and feels it needs, some recognition of the prior claims of the bondholders may have to be accorded first, and it may well have been some such thought as this which lay behind Sr. Fernández’ remarks mentioned at the beginning of this despatch. At Chile’s present and prospective economic and financial levels, reconcilation of the claims of the bond-holders with the demands which will be made by new lenders and investors will not be easy. At present, moreover, the situation is complicated by the fact that applications for new foreign loans by Chilean organizations are not screened by a responsible credit-control authority. Although the Government must keep some sort of record of foreign loan authorizations granted from time to time in new legislation, the Embassy is not aware that the Government, or any of its agencies, has ever drawn up a carefully-constructed over-all credit program closely relating the country’s really essential needs with its ability to pay for them. Instead, a much more haphazard policy seems to have been followed, based more on wishful thinking than on any technical calculations or justifications.

When this feature of the situation was mentioned by the Economic Counselor to Sr. Fernández, the latter agreed that Chile would be able to make a much better case for itself in future loan negotiations if it were to draw up a definite foreign-credit program, covering the estimated needs of the country as a whole for a definite period of years, and in which the cost of servicing the old and the new indebtedness could be closely—and demonstrably—correlated with the country’s prospective exchange resources. The task of preparing such a plan, however, would be a formidable one. The Fomento Corporation57 [Page 812] has had considerable experience in justifying its own applications to the Export Import Bank, but this has not been done on an all-inclusive, national basis. An attempt by a responsible Finance Ministry official to estimate Chile’s foreign exchange resources for 10 years ahead, and then to allocate this exchange to various imports in relation to their essentiality, has had to be abandoned recently, due to the official’s inability to obtain cooperation or worthwhile estimates either from private sources or from Government agencies themselves. However, more strenuous efforts would appear to be fully warranted by the importance of such a survey to Chile in connection with its future foreign credits, and it is to be hoped that it will eventually be accomplished. If a higher degree of organization and rationalization in the credit field could be achieved in Chile, particularly if this were to be complemented by a greater centralization of credit responsibility abroad such as would be afforded by the Bank for Reconstruction and Development proposed at Bretton Woods,58 Chile’s position in this respect would be immeasurably improved.

As of considerable interest in connection with the general question of Chile’s debt-service policies, there is attached, as an enclosure to this report, a translation of a public statement59 made last April by Sr. Santiago Labarca, at that time Finance Minister, which he handed to the press in reply to an article published shortly before in the London “Financial News.” The British journal, after noting the large increase in Chile’s foreign exchange revenues during the war, criticized the decline which has occurred in the amount devoted to service of external obligations during the last few years.

Sr. Labarca’s reply to the latest criticism from abroad was published in the leading Santiago newspapers under the headline “Chile is Fulfilling Its Obligations to Holders of Bonds of the External Debt”—a summary statement which reflects fairly faithfully the general tenor of the Minister’s remarks. Chile has regularly paid the interest called for by Law 5580, he says, and although most of the funds earmarked for amortization have had to be diverted to earthquake relief since 1939, he “takes pleasure in being able to announce that such redemptions [i.e., purchases of bonds at market prices] have nearly been restored to their normal level within the scope of Law 5580.” This indication that bond purchases abroad are probably considerably larger this year than in 1944 was subsequently reported [Page 813] in the Chilean press to have resulted in a sudden spurt in the price of Chilean sterling bonds in London, from 22%½ to 24½.

Publication of the Minister’s statement was followed by the appearance of a number of editorials, all of which commented favorably upon it, thus indicating that, for public consumption at least, the Chilean press agreed with Sr. Labarca’s opinion that “Chile is currently fulfilling, correctly, its obligations towards the holders of bonds of the External Debt.”

Respectfully yours,

Claude G. Bowers
  1. Not printed.
  2. Neither printed.
  3. Corporación de Fomento de la Producctión, a Chilean governmental corporation.
  4. For text of agreements pertinent thereto, signed December 27, 1945, see Department of State Treaties and Other International Acts Series 1501 and 1502, or 60 Stat. (pt. 2) 1401 and 1440. For documentation on the Bretton Woods Conference, see Foreign Relations, 1944, vol. ii, pp. 106 ff.
  5. Not reprinted.