825.51/10–1746
The President of the Foreign Bondholders Protective Council, Inc. ( Rogers ) to the President of the International Bank for Reconstruction and Development ( Meyer )
Dear Mr. President: As suggested in your recent letter responding to ours of June 3,5 on the general topic of the International Bank’s policy as related to loans of nations applying for credit which have outstanding public foreign debt, we write in regard to one case which the press reports as being now before the Bank. This involves a loan to the Republic of Chile.
As we have stated elsewhere, it is not the Council’s view that the Bank should in every instance deny credit to a country which has failed to pay fully or promptly a foreign debt. In most cases, perhaps, the failure to meet public debt indicates either economic weakness, or a nation’s lack of those standards of obligation which are equally involved in an estimate of credit. But this may not be necessarily true. There are some cases, however, in which the history of a public obligation of a nation throws much light on its claim for international credit and in which an application for a loan offers an opportunity to clear up a situation for the benefit both of the country and its creditors. Chile seems to us such a case.
In 1931 Chile made a general default on all its outstanding foreign debt, the principal of which totalled about $265 million on issues payable in American currency, nearly £30 million due in sterling and approximately 84 million due in Swiss francs. Chile’s previous sterling debt record had been excellent and its credit high. The default was attributed in part to general economic conditions, world-wide in application, but in part also to special circumstances affecting the markets for nitrate and copper, on the basis of which Chile’s national finance had largely rested.
The subsequent history is one of a series of events and transactions, nearly all unilateral offers by Chile to its bondholders, the terms of which and the extent of compliance or non-compliance with which has kept the financial centers of the United States and Europe in a state of recurring criticism and anxiety. Without reciting the earlier incidents (Which will be found fully reviewed in this Council’s Annual Reports), it is enough to mention the recent years. In 1935 Chile passed a law pledging the national receipts from nitrates and copper [Page 601] to the service of its external debt. If such an arrangement had been made in the form of an adjustment negotiated with the institutions representing the several chief creditor countries, if Chile’s resources had been duly discussed and considered, and out of such consideration a contract had developed, the proposal might have developed into a permanent and workable debt settlement, which was recommended, explained and approved by spokesmen for her creditors. Such discussion and agreement has been for a hundred years the customary and almost universal procedure for adjustment of a defaulted foreign debt. As a unilateral action, the Chilean offer became and it remains today, subject to change, in the view of Chilean political leaders, whenever internal pressure for funds is acute. As a consequence, the foreign holders of bonds have seen their obligations altered from the status of a debt with a fixed return to a claim on what Chile felt she could afford as the years went by and, since 1939, the return as measured by annual interest has fallen almost steadily from about 2% paid in 1939 to about 1.2% paid in the year 1945. Chile diverted from the funds available for interest and amortization first a considerable sum on the plea of an earthquake disaster. Then she enacted and inserted prior taxes on copper production which seriously diminished the revenues she herself had pledged to debt service. All this action was unilateral and over the repeated protests of the institutions speaking for her bondholders. As the years have gone, the nation has bought up much of her foreign debt by purchases at prices depreciated by her own default and by the unpredictability of her future policy. Recently Chile enacted a statute forbidding hereafter one form of diverting revenues pledged to bondholders but in general conditions are not bettered.
The foregoing is a merecrude condensation of events which are too complicated for useful recital here and which will be found fully set forth in the Annual Reports of the American and British Councils.
The upshot of this history is that Chilean credit in recent years has been almost continuously a topic of adverse criticism in this country and Europe. Her application for an international credit, without any steps to remedy the present status of her earlier indebtedness, will probably increase the feeling among bondholders and in banking circles here and abroad that Chile is not a responsible and just debtor. The early history of the nation’s indebtedness only accentuates what seem to us to be the unnecessary losses suffered by her American and European creditors and the equally unnecessary losses the Chilean nation has faced in public standing.
[Page 602]This history puts Chile in the position of an international borrower who has not met the sound and accepted standards of finance. The standards require of a nation at the threshold a willingness to pay her debt and to submit her problems to negotiation. When these elements are absent in a debt history, the Council feels it should speak and that the Bank should be especially concerned. If these elements are ignored in the Bank’s policy, its own loans may soon be in difficulty, however prosperous the world, and there may well be precipitated new defaults on publicly offered securities.
An unsound administration of public debt injures both the creditor and the debtor, both the bondholders and the nation. It is our feeling that the International Bank can and should, in its own interest, as well of that of all concerned, including Chile, see to it that the practice built up in the last dozen years is replaced by a sounder regime for the Chilean public debt. The Bank is designed, not as merely a pool of money, but to serve international public interests. The economic position of Chile is today much improved. Her internal and external political problems are fewer. The prospects are rather bright if she administers her financial affairs in conformity with standards accepted in a commercial world. There is no reason why Chile should be classed as she is today with the less developed nations which have never established reputations for having either sound economics or the sense of financial responsibility. Chile has had a sound economy and has shown financial responsibility in the past and can maintain both in future.
Respectfully,
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