Foreign Relations of the United States, 1948, The Western Hemisphere, Volume IX

825.51 Bondholders/1–1548

Memorandum of Conversation, by the Chief of the Division of North and West Coast Affairs (Mills)

confidential

[Washington,] January 15, 1948.

Participants:	Señor Felix Nieto del Rio, Chilean Ambassador
	Mr. Armour, Assistant Secretary of State
	Mr. C. Tyler Wood, Deputy to the Assistant Secretary for Economic Affairs
	Mr. Mills, Chief of NWC

The Chilean Ambassador opened his visit with Mr. Armour by stating he had good news, namely that as a companion accomplishment to reaching agreement with the American Bondholders’ Protective Council, agreement had also been reached with the British and the Swiss bondholders. He said the British were not pleased with Mr. Rogers² of the American Council since they considered he had been “too soft” in dealing with the Chileans. An announcement of the agreement, the Ambassador added, will be made shortly in Chile to be followed by an announcement in the United States. He observed that the agreements would have to be submitted to the Chilean Congress for ratification but he considered the prospects for ratification good.

Almost with indifference the Ambassador mentioned that Señor Roberto Vergara³ was negotiating with the International Bank for a loan to Chile. He added that the Bank had suggested certain provisions regarding guarantees for such a loan which Chile could not accept. When pressed for details he said one unacceptable provision was that dollars from copper, nitrate and iodine production would be pledged to loan service. He did not make clear whether the proposal was to pledge all dollar proceeds accruing to Chile from the export of the three products, or merely the dollars accruing to Chile from taxation of exports of these products. Mr. Mills asked whether the latter dollar proceeds were not already pledged under a law of the early 1930’s, Law No. 5107 he believed to be the number. The Ambassador said that such was not the case since the law in question merely turned over copper, nitrate and iodine tax dollars to the Amortization Institute without any guarantee to the foreign bondholders they would be used exclusively for foreign debt service. The International Bank wished a mortgage on such dollar income and Chile could not give that.

The Ambassador gave the impression he is not greatly worried over the present status of negotiations with the International Bank. In fact he stated he was optimistic that Chile might obtain a loan which would finance certain specific projects requiring perhaps $10 millions or $12 millions as compared with its request for $40 millions.

Roberto Vergara in a state of great excitement had spoken with Mr. Ness, Director of OFD,⁴ on January 13 regarding his meeting with officials of the International Bank the previous day. His agitation resulted in consultations in the Department and by telephone with Mr. McCloy⁵ of the Bank by Mr. Lovett⁶ and Mr. Armour. Mr. McCloy told Mr. Armour that:

(1) In the proposed agreement there was a provision that if at any future time the Chileans pledged any of their revenue, they will pledge it on old bonds (including, presumably those covering the proposed loan from the Bank) prior to pledging them to any other use.

(2) The Bank does not want any prior position but it does not wish anyone else to have a prior position.

(3) The Bank fears there may already be a prior lien on Chilean dollar revenues as, for example, in a letter to Eximbank from a former Chilean Ambassador which in a cloudy way states the revenues of Chile are behind an Eximbank loan.

(4) If the Chileans only would keep quiet for awhile the Bank might be able to work out something.

(5) The proposed loan to Chile is doubtful, the Chilean situation is “messy,” and steps taken so far have not yet gotten them out of the woods; the report of the International Bank mission to Chile was gloomy.

(6) The Chileans should aim at loans for specific projects for say $5 millions or $10 millions but the Chilean financial situation is so poor the Bank cannot make a loan until it is cleared up.

Both Mr. Armour and Mr. Wood tried to find out from the Ambassador whether any “prior lien” had been given by the Chileans to the Bondholders’ Council, or Eximbank. The Ambassador was, or pretended to be, uninformed but thought not. He said Señor Roberto Vergara knew the details and he would have him contact Mr. Wood, and Mr. Mills, next time he is in Washington.

In view of Mr. Armour’s conversation with Mr. McCloy of the Bank, the Ambassador’s optimism appeared to be scarcely justified. The question is whether he is as naive as he appears to be on this subject or whether, being very canny, he realizes that success with the International Bank demands that the Chileans keep quiet for the time being while the Bank works out something, as suggested by Mr. McCloy (numbered point (4), above).

After the departure of the Ambassador, Mr. Armour indicated that in view of the unjustified optimism of the Ambassador he felt the Department should pursue the matter further with Mr. McCloy. He instructed Mr. Mills to consult Mr. Ness as to what should be the next step of the Department vis-à-vis Mr. McCloy and the Bank.

Mr. Wood inclined to the view that since the Chilean Ambassador had not complained, perhaps the Department need not take any further action.

Mr. Mills was of the opinion that the lack of complaint on the part of the Ambassador must be due to a misinterpretation on his part of the attitude of Mr. McCloy. The Ambassador had stated that McCloy had told the Chilean Director of the Bank, Señor Fernando Illanes, he did not approve the drafting of the proposed controversial clause. He said that Senor Fernando Illanes had replied that Chile could not accept its substance. From this the Ambassador concluded that Mr. McCloy did not like the clause. Later in the day Señor Mario Illanes, Commercial Counselor of the Chilean Embassy and cousin of the Chilean Director of the Bank, telephoned to say that the Ambassador wished to clear up any wrong impression he may have given Mr. Armour; he had learned that Mr. McCloy had not drafted the clause in question but it had been written by the legal department of the Bank. The Ambassador had not given such an impression, but just the reverse. Señor Mario Illanes, in reply to questions, added that this morning (January 15th) Mr. McCloy again had told his cousin he did not like the wording of the clause in question. To jump to the conclusion that Mr. McCloy is opposed to the aim of the clause, as the Chilean Ambassador apparently has done, appears to be unjustified unless Mr. McCloy has changed his position since his telephone conversations with Mr. Lovett and Mr. Armour yesterday (January 14).

2. James Grafton Rogers, Chairman, Foreign Bondholders Protective Council.
3. Representative of the Chilean Corporación de Fomento de la Producción.
4. Norman T. Ness, Director, Office of Financial and Development Policy.
5. John J. McCloy, President, International Bank for Reconstruction and Development.
6. Robert A. Lovett, Under Secretary of State.