823.51/3–1347
The Secretary of State to the Embassy in Peru
The Acting Secretary of State transmits the text of the statement on the Peruvian debt legislation of February 28, 1947 released by the Foreign Bondholders Protective Council for publication in morning papers March 12, 1947. The Department understands that it was unanimously approved by the Council members and that there is some disposition among them to issue a stronger statement if Peru comes out with the plan authorized by the legislation.
“Foreign Bondholders Protective Council, Inc. sends herewith for your information the text (in translation) of legislation, passed February 28, 1947 by both houses of the Peruvian Congress, empowering the Executive authority of Peru to resume service on the Dollar bonds of the 7% and 6% issues of Peru, and on the 7–1/2% issue of Callao, under a plan which would call for (1) cancelling all interest arrears earned until December 31, 1946 (or for more than 16 years), and (2) depositing funds in the Central Reserve Bank of Peru for its opportune conversion into dollars for annual interest at 1% for 1947 and 1948, l–½% for 1949 and 1950, 2% for 1951 and 1952, and 2–1/2% for 1953 and thereafter, and for annual accumulative amortization at 1/2%. The legislation empowers also the Provincial Council of the City of Lima to resume service on its foreign debt in the manner that it may deem convenient.
“The Council calls attention to the fact that no formal offer has been made to the bondholders under this legislation.
“If the Government of Peru undertakes to resume service of its dollar bonds on the basis of the legislation of February 28, 1947, the [Page 1007] Council will not recommend to the holders of the dollar bonds acceptance of the plan proposed. Peru, in our judgment, can and should resume service on terms considerably nearer a recognition of its contract obligations.
“The Council’s principal objections to the legislation may be summarized briefly as follows:
- “(a) The ultimate interest rate (2–1/2% reached in the seventh year) is below standard. The Council has not considered so low a rate adequate in the case of any other country attempting to rehabilitate its credit after a default.
- “(b) The cancellation of all interest arrears, covering service earned and due for approximately sixteen years is a departure from the principles required for a reasonable debt adjustment.
- “(c) The legislation is not clearly an obligation to pay service promptly in dollars but contains (in Section III) an ambiguity or implication that Peruvian soles deposited for service may be converted into dollars only when considered opportune.
- “(d) The legislation does not purport to authorize an offer, subject to acceptance by bondholders (as is customary and necessary in bond adjustments) but to be a unilateral change made by Peru in its contracts with all bondholders, with or without their consent.
- “(e) The service obligation assumed is disproportionately low. Peru faces just now an acute shortage of foreign exchange, but according to the best figures available to the Council, the money called for in the year 1947 is less than 1% of the current Peruvian national budget and only about 1% of the value of Peruvian world exports last year.
“The Council refused to acquiesce in the service rates set forth in this legislation when informed of them before the law was enacted and the Peruvian Government was so advised. The Council now reiterates its position for the public information. It thanks the American Government for its good offices through many years given to the Council in its effort to arrive at a debt settlement with Peru which the Council could recommend, and hopes that Peru may later come to face its debt problem more nearly in the light of its contractual obligations and its own best interests.
[Here follows the text, in translation, of the Peruvian law of February 28, 1947.]