The Ambassador in Chile ( Bowers ) to the Secretary of State
[Received August 8.]
Sir: I have the honor to refer to my Airgram No. A–316 [A–306] of June 20, 1945,62 and Despatch No. 12,368 of July 2, 1945, the latter entitled “Possible Revision of Chile’s External Debt” (both file no. 851—Foreign Debt). As a supplement to these previous reports there is transmitted as Enclosure No. 1 to this despatch a memorandum of a recent conversation62 on the same subject between Sr. Alfonso Fernández, General Manager of the Caja de Amortización (the Government’s debt-service agency) and a Secretary of the Embassy.[Page 814]
Sr. Fernández made it clear in this conversation that serious consideration is being given to the advisability and possibility of reducing the nominal value of Chile’s external debt to a level at which the country would find it possible, on the basis of the probable foreign exchange resources available for that purpose, to offer satisfactory service terms to foreign bondholders. It appears from Sr. Fernández’ remarks that the Government as yet has no definite figures in mind. The possibility mentioned by Sr. Fernández that a relatively favorable conversion rate might be made available to the original purchasers of Chilean bonds who still retain their securities, whereas only a “reasonable return” would be given to persons who had bought bonds in recent years as a speculation, is particularly interesting.
Just what portions of Chile’s over-all external debt would be included in any such revision is still not clear. In the interview covered by the attached memorandum, Sr. Fernández at all times spoke as though he had in mind only that part of the debt which is now covered by the provisions of Law 5580 of January 31, 1935, and which is serviced by the Caja de Amortización. This includes the direct funded debt and part of the guaranteed debt, the latter consisting chiefly of municipal and mortgage bonds. There has been no indication that Chile would attempt to include such indirect obligations as those of the Fomento Corporation to the Export-Import Bank in any such plan. The status of the “short-term” foreign banking loans and the (sterling) notes held by certain portworks’ contractors is uncertain. These are covered by individual agreements with the holders of the notes or obligations, which in the past have been periodically renewed. In view of the Government’s attitude in the Guaranty Trust Company case last year (Embassy’s despatch no. 273 of June 20, 1944,63 entitled “Partial Retirement of Chilean External Short-Term Debt”, file no. 851) it appears likely that if an over-all debt composition plan is put forward, holders of these short-term notes may find that when their present agreements next come up for renewal the Government might offer new terms to them as well. It seems most improbable, however, in view of Chile’s obvious anxiety to contract large new foreign loans and credits, that any attempt will be made to revise the indebtedness incurred in recent years under lines of credit extended by the Export-Import Bank or by private banks or manufacturers in the United States to semi-governmental Chilean organizations. Service of such obligations is not performed by the Caja de Amortización.
Sr. Fernández clearly had in mind, when discussing the debt plan, the allocation to service of the “new” reduced debt, of the same Government revenues which are now earmarked for that purpose. [Page 815] Whether or not these funds would be sufficient to provide satisfactory service under any such plan is open to question. From the table on page 3 of the Embassy’s despatch no. 12,368 cited above, it will be seen that total debt service revenues have fallen from a high of US$ 14 million in 1938 to US$ 6.6 millions in 1944. The decrease of about 35 percent which has taken place in the last three years (from US$ 10 millions in 1942, to US$ 6.6 millions in 1944) is due primarily to a substantial increase in the costs of production of the large American-owned copper companies, which has reduced their profits and, accordingly, the income taxes which they pay to the Government. It is difficult to see how the Government’s revenues from copper and nitrates now allocated to debt service under the provisions of Law 5580 could be stabilized in such a way as to provide satisfactory assurances to bondholders. The outlook for both copper and nitrate in the postwar period is uncertain, and the Government might well have to earmark additional sums for the purpose indicated.
One of the most interesting points involved in this whole question is the conversion rate which Chile could afford to offer to original purchasers of its bonds, and which the latter would be willing to accept. In this connection the remarks of a bondholder who recently wrote to the Embassy are of considerable interest.64 In his letter he stated that he bought one US$ 1,000 Chilean bond at 93¼, presumably in 1927 or 1928. On this bond he received US$ 270 interest up to the time of default. When the debt reorganization offer of 1935 was made he sent his bond to the Government’s fiscal-agent in New York for stamping, since which time he has received a total of US$ 128.11 in interest. Thus, of his original investment of US$ 932.50, he has had returned to him in the form of interest a total of US$ 398.11. His actual net investment in the bond is accordingly US$ 534.39. There would thus appear to be some possibility that if original bondholders were offered new bonds for approximately 50 percent of the nominal value of their present holdings they might be willing to accept the Government’s proposition, which would enable them, at least, to get the greater part of their money back—assuming that the new bonds would be quoted around par—although without interest.
Enclosure no. 2 to this despatch65 contains the text of a memorandum which was issued in the United States, in English, under date of March 12, 1935, by the Chilean Special Financial Commission which went to the United States ten years ago to submit the debt reorganization plan contained in Law 5580 to American holders of Chilean bonds. [Page 816] This is transmitted in the thought that the background which it gives on the first debt composition offer is of interest and value at this time, when there appears to be every likelihood of a new move, although along somewhat different lines. It need hardly be added, however, that statements made by the Commission in 1935 as regards the terms of service under the plan, have been substantially modified by occurrences in subsequent years. Since 1939 nearly US$ 25 millions have been withheld from amortization of the debt and have been diverted to the Reconstruction Corporation. As it appears unlikely that these funds ever can or will be restored for their original purpose, the definite elimination of this “indebtedness” may possibly prove to be an important feature of whatever plan the Government eventually proposes. Foreign bondholders have also been denied the funds which they in all probability expected would accrue to the debt-service fund as a result of Chile’s large wartime exports of copper. Rising production costs, as mentioned above, are partially responsible. In addition, as the result of a special agreement reached late in 1941 between the United States and Chilean Governments, an increase of 1¾ cents per pound in the price of Chilean copper was granted, but Law 7160 of January 20, 1942 taxed away 1¼ cents per pound of these increased revenues to the copper companies. Had this additional income been taxed under the income tax law, part of it would have gone into the debt-service fund. As they were subjected to special taxation, however, this was not the case, and the Government’s revenues from this source have been devoted to a variety of domestic projects.
Sr. Fernández appears to be sincerely anxious to discuss this whole question in detail when he arrives in Washington sometime towards the end of this year. As is noted in the attached memorandum, he wishes to restrict his contacts at this time to Government circles and desires to discuss the matter with persons in the Government who would not only be able to talk to him on a policy level but would also be familiar with the technical details of such operations. It has been suggested to Sr. Fernández that when he arrives in Washington, he call first at the Department of State, where he could not only discuss the matter, but could also be put in touch with other officials of the Government who would be interested in the problem.
One additional aspect of the matter should, perhaps, be mentioned in conclusion. Sr. Fernández has now discussed the question of debt revision on two occasions with officers of the Embassy. In doing so, he must have realized that a report would be made to Washington. This gives rise to a question as to the motives which led Sr. Fernández to bring the matter up as he did. It may well be that, as he expects to spend only a relatively short time in Washington, he simply feels that it would be to his advantage to have some thought given to the [Page 817] matter prior to his arrival, so that his talks could be expedited. A more interesting possibility is that he is sending up, as delicately as possible, a trial balloon. The attitude of the United States Government will obviously be a most important factor in determining the Government of Chile’s ultimate decision. As matters now stand, if the United States’ reaction should prove to be entirely and emphatically negative, the Chilean Government could always deny that it had ever had any such idea in mind, and attribute the whole affair to Sr. Fernández. On the other hand, the possibility also exists that the authorities may feel that by advancing an implied threat to repudiate a substantial part of the national debt at this particular juncture, the country’s bargaining position with regard to assistance requested from the United States might thereby, in one way or another, be improved. This motive may not exist in the situation but the possibility of its existence should not be overlooked.