823.51/12–1246: Telegram

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

us urgent

1251. Yesterday I informed President Bustamante that no Export Import Bank loan would be made until Peru had made some satisfactory arrangement toward settling its external dollar debt. The [Page 1259] President in turn informed me that it would not be possible to secure approval of the Peruvian Congress for Montero Bernales’ proposal for dollar debt settlement of last spring. President stated that he would ask Congress to make best offer now possible for Peru to make to bondholders and would do his best to secure passage of such a measure through Peruvian Congress now in special session. President’s position was confirmed by previous conversation had with Haya de la Torre who stated that he could not go back to Peruvian Congress with old proposition which he considered dead and that new proposition was necessary as face saving proposition to win over necessary support from those opposing Montero Bernales’ proposal.

President Bustamante designated Minister of Finance, President of Central Reserve Bank of Peru, and Senate Finance Committee and Chamber of Deputies Finance Committee to formulate the best proposal of which Peru is considered capable of making at the present time. All this was to be done in strictest confidence but President stated I would be kept fully informed. President Bustamante revealed in greatest confidence financial instability of present Govt and stated a loan of 20 million to 30 million dollars was urgently needed to purchase machinery and materials necessary to keep Peru’s industry running and prevent unemployment of dangerous proportions in the next 60 days. President stated he is compelled to deny import licenses for machinery and materials on account of exchange situation, said action to cause shutdown of numerous Peruvian industries in near future. President stated he hoped to receive me by next Tuesday by which time he hoped to have Peru’s offer formulated.

My appraisal of situation is as follows.

1. The debt should be settled at once with annual dollar debt payment placed in Peruvian budget by December 31 if the debt is likely ever to be collected. My reasoning being that to postpone matter for another year would in all likelihood invite developments which would result in a new loan to Peru which when made would nullify further chances of collecting the old debt. My belief is that a reasonable offer can be gotten at this time through the Peruvian Congress, even though this be a unilateral offer not receiving the 100 per cent approval of the bondholders at the moment, yet same would greatly benefit bondholders and would remove obstacles to good economic relations now existing between Peru and US.