823.51/2–1946

The Ambassador in Peru ( Pawley ) to the Secretary of State

[Extracts]
confidential
No. 1026

Sir: With reference to Embassy’s despatches Nos. 963 and 987 of February 5 and February 8, 1946,78 respectively, regarding the publication of objections to the debt settlement by former Ambassador [Page 1252] Pedro Beltrán, I have the honor to forward herewith a brief summary of Sr. Beltrán’s ten principal objections together with matter in refutation supplied by members of my staff, for information and possible comment by the Department.

His objections may be summarized as follows:

1.
Peruvian favorable balance of trade is not sufficient to permit of payment in accordance with ability to pay.
2.
He objects to precipitate nature of negotiations.
3.
Although 3.5 million dollars (for a petroleum concession) will be available in 1946 for debt service, he questions whether there will be similar sums available in succeeding years.
4.
He cites uncertainties of postwar markets and experience after the last war as reasons for proceeding with more caution and not undertaking a new and large commitment on which in turn there might be a default.
5.
He cites Peru’s increasing demand for dollar exchange as further adversely affecting possibilities of recommended settlement.
6.
National defense expenditures (since lend-lease termination) might have to suffer if present settlement terms are complied with.
7.
He alleges his belief that proposed settlement terms are in excess of bondholders’ expectations.
8.
States that negotiations by Montero79 have caused greatly increased speculative market activity and price rise in Peruvian bonds substantiated by total bond transactions during Montero’s regime of 68 days amounting to $13,900,000 as compared to total of only $2,137,000 during previous Finance Minister Ferrero’s incumbency of 78 days, requiring more dollars for Peru to retire debt.
9.
States that export-import bank loans are not necessarily predicated upon external debt settlement and cites recent Ecuadoran and Colombian loans as proof.
10.
He infers that the present good relations between Peru and the United States are being endangered by the diplomatic activity in trying to bring about the debt settlement which he states may be regarded as an intervention in an entirely domestic affair.

1.
Sr. Beltrán’s first objection that Peru’s balance of trade is not sufficient to permit payment in accordance with the proposed plan is both hackneyed and specious. It has been reiterated ad nauseam by all opponents of debt settlement and has no basis in economic fact, since the payment of an external debt has little direct relation to a favorable balance of trade, but rather to the country’s ability to secure additional revenue with which to meet the debt service requirements. The total foreign trade is therefore a better criterion since taxes are levied on the two-way flow. Peruvian foreign trade has shown consistent increases in recent years.
During recent years Peru has been able to purchase from foreign countries such as the Argentine and Brazil, at exorbitant prices, commodities [Page 1253] and consumer goods for which it has found the means to pay and, in spite of these purchases, has still been able to maintain a considerable balance of exports over imports.…
2.
The complaint of precipitate negotiations is somewhat amusing coming from the lips of an individual who during five years maintained an unbroken record of procrastination in this regard as Ambassador in Washington. Any negotiations toward settlement would be to him precipitate.
3.
Beltrán’s indication that a specific government revenue of $3,500,000 would be available in one year only is both misleading and incorrect. It implies that $3,500,000 would be required the first year and every year thereafter, which is not the case. The proposed agreement was to pay 1% interest, or $926,000 the first year, 1½% the second, 2% the third, 2½% the fourth, and 3% the fifth. Amortization was to be ½ of 1% annually during the first five years. After the fifth year, 3½% was to be paid—3% on interest and the rest on amortization.
The necessary amount of dollars to meet the debt payment together with other necessary imports for Peru will undoubtedly be available if only due to the production of goods in Peru formerly imported and paid for in dollars.…
A third factor which should stretch Peru’s dollars further is, that with the return of competition, speculation in imported merchandise will be reduced and less foreign exchange will be necessary for purchase of these commodities. In any event, the argument against availability of dollars for debt payment is easily refuted by the fact that the present exchange control system has produced a reserve of $15,000,000 up to the present time. While this may be regarded as a very small reserve, it is nevertheless being increased steadily, while Peru continues to purchase its many imports in dollars.
4.
Sr. Beltrán’s objection based upon postwar economic uncertainty is the usual reactionary pessimistic viewpoint which appears to be completely unrelated to the present economic prospects and is definitely out of tune with the aggressive, ambitious and optimistic program envisioned by the present government.
5.
A fifth objection by Beltrán that there will be an increasing demand for dollars by Peru can be answered also by the reasons given against his third point regarding unavailability of dollars at present. It should be emphasized that there are dollars available and there will continue to be dollars available if present economic trends and government policies are continued.
6.
Beltrán’s argument that expenditures for national defense purposes would have to suffer should the debt settlement terms be complied with is an obvious but clumsy attempt to frighten the military and enlist their support and to put the whole debt settlement question upon a false nationalistic basis. As a result of the lend-lease supply of military equipment during the war, the Armed Forces are unusually well equipped and for the next few years might well restrict their needs merely to maintenance expenditures. Moreover, economic reasons do not support the argument that if the debt is paid, military procurement will have to suffer correspondingly.
7.
Beltrán’s seventh point is a bald statement that the debt settlement terms exceed even the bondholders’ expectations. Sr. Beltrán’s statement is at variance with statements of the Bondholders’ Council80 and it is left to the reader as to whose statement to accept.
8.
Sr. Beltrán’s eighth point that preliminary negotiations in the United States caused a flurry of speculative market activity in Peruvian bonds is just another “dead cat” argument. Naturally any announcement that Peru would undertake to honor her foreign financial obligations would of necessity give rise to an increase in the value of its bonds on the market, but this is hardly a reason to impute bad faith or culpability to Montero Bernales, who in good faith and duly commissioned by the Government of Peru, was carrying out a preliminary phase of the rehabilitation of Peru’s credit.
9.
Sr. Beltrán’s ninth point is debatable. He states that it has not always been a policy of the United States Government to require the reestablishment of the servicing on an external debt as a condition precedent to the obtention of an Ex-Imp loan. He cites the examples of Ecuador, Colombia, and Chile as recent evidence that the United States is not requiring foreign debt undertakings before granting these Ex-Imp loans. An expression of policy by the Department in this instance would be of value to the Embassy.
10.
As to Sr. Beltrán’s accusation that good relations are being endangered between our respective countries, this I submit is patently absurd. I would venture to state that at this juncture Peruvian and American relations are as good as, if not better than, they have been in the past. From the standpoint of this Mission, good working relationships have been established with members of the present government who have indicated their firm purpose to abide by Montero Bernales’ negotiations. Excellent cooperation has been evidenced also by Aprista leaders, in particular by Haya de la Torre himself. It must therefore be presumed that Beltrán is merely inventing this [Page 1255] charge to support his own position and to frighten those less informed with that old buagaboo, “Intervention”.

. . . . . . . . . . . . . .

In spite of Sr. Beltrán’s attempted attack upon the debt settlement, the fact that an item to provide for the first year’s service thereon has been included in the 1946 budget just presented to the Peruvian Congress is ample proof that his protestations have had little political effect.

Respectfully yours,

William D. Pawley
  1. Neither printed.
  2. Carlos Montero Bernales, Peruvian Minister of Finance.
  3. Foreign Bondholders Protective Council.