Foreign Relations of the United States, 1951, Asia and the Pacific, Volume VI, Part 2

Lot 60 D 147

Minutes of the 187th Meeting of the National Advisory Council on International Monetary and Financial Problems

secret

[Washington,] December 7, 1951.

[Here follows a complete list of the attendants at the meeting. Those whose remarks are recorded are identified in the text.]

RFC $60 Million Loan to the Republic of the Philippines

Mr. Glendinning¹ explained that the Government of the Philippines had raised, with the Reconstruction Finance Corporation, the question of a possible extension of maturities for $60 million of outstanding indebtedness to the RFC, $25 million maturing on January 1, 1952, and $35 million on July 1, 1953. He pointed out that, in the Staff Committee, representatives of the RFC indicated that they regarded themselves as agents, and were requesting the advice of the Council regarding an orderly liquidation of the loan. The action prepared for the Council by the Staff Committee recommends increasing the interest rate from 2 to 2½ percent and extending maturities either 6 or 10 years. The majority of Staff Members felt that 10 years would be preferable, based on findings of the Bell Mission, recent developments in Philippine finance, and the smaller annual burden on the Philippine economy. In support of the 6 year maturities, Mr. Glendinning noted that mention had been made of possible additional Philippine financing by the Export–Import Bank. Thus, with a period of grace on these new loans, and 6 year maturities on the RFC credits, roughly equal annual servicing requirements could result over the next decade.

Speaking at the invitation of the Chairman,² Mr. Potts³ observed that the Reconstruction Finance Corporation considers itself in the nature of fiscal agent for the United States Government in this case since the credits are outside the normal purview of the RFC. While in accord with the Staff Committee recommendations, the RFC would like to see the 6 year term adopted, but if the Council decided on a 10 year maturity, the RFC would prefer a 3 percent interest rate. Concerning the legality of the extension, Mr. Potts remarked that the RFC believed that it had the power to take whatever action appeared necessary to result in a more orderly liquidation of the indebtedness but not to terminate the old indebtedness. Thus the proposed extension would take the form of a supplemental agreement.

The Chairman said that there appeared to be two questions up for decision: (1) agreement with respect to extension of the credits by the RFC, with repayment at an interest rate of 2½ percent commencing January 1, 1952, and (2) the term of maturity. In connection with the latter point, Mr. Thorp commented that field representatives of the various United States Government agencies were in agreement on a 10 year maturity. He pointed out that the Bell Mission Report also recommended 10 years, and stressed the recent favorable actions taken by the Philippines to meet the recommendations put to them by the Bell Mission. Concerning the interest rate, Mr. Thorp recalled that the earlier 2 percent rate was set not as a profitable banking transaction, but as one that would at least cover the cost of money to the United States Government. He concluded by stating that the State Department recommended adoption of a 10 year maturity, and an interest rate of 2½ percent.

With reference to Mr. Glendinning’s statement that a 6 year maturity would tend to level out repayments over the entire period, Mr. Cleveland⁴ inquired about what new loans were in prospect for the Philippines. The Chairman replied that the Export–Import Bank was considering a $15 million power loan,⁵ plus certain other projects. Mr. Cleveland added that he was in general agreement with Mr. Thorp on both the longer maturity and the 2½ percent interest rate. He cautioned that once the criterion of cost to the Treasury is abandoned, he could see no other criteria to adhere to in setting a rate. He concluded by noting that past ECA loans have been made at 2½ percent, and that MSA expects to make additional “forced” loans this year (under the 10 percent clause) at a similar rate.

The Chairman indicated that he had hoped that the rate on “forced” loans would be a little higher than the existing rate on ECA loans. He then referred to the Bell Mission Report, pointing out that some of the members of the Mission felt strongly that the 2 percent rate should be continued. In his opinion, however, such a rate seemed out of the picture, since it would involve a loss to the lending agency.

Mr. Szymczak⁶ requested the views of the Export–Import Bank as to both an appropriate maturity and interest rate, and concurred in Mr. Gaston’s reply that 10 years at 2½ percent would be appropriate. Mr. Potts called the Council’s attention to the manner in which a draft letter to the Philippines should be phrased, noting that the Philippine Government had offered “budgetary difficulties” as a reason for the requested extension. He said that he would prefer to simply state in the reply that it was contemplated at the time the original loan was made that a re-examination of terms would be considered at a later date. Accordingly, the RFC would now like to enter into a supplemental agreement. He emphasized that the RFC wished to avoid leaving the impression with the Philippines that if they have future budgetary difficulties, favorable consideration would be given to further extensions.

The Chairman observed that there appeared to be unanimous approval for a 10 year maturity at 2½ percent interest, with 20 equal semi-annual installments beginning January 1, 1952. He added that it should be understood that this information was to be regarded only as advice to the RFC in reply to their request. Without further discussion, the recommended action was adopted.

Action: The following action was taken (Action No. 508):

The National Advisory Council recommends, for the orderly liquidation of the loans, that the Reconstruction Finance Corporation extend the maturity of its credits to the Philippine Government. Repayment should be provided for on the basis of 20 equal semi-annual payments of principal at an interest rate of 2½ percent per annum on the principal outstanding, with the first payment of principal due on January 1, 1952.⁷

1. C. Dillon Glendinning, Secretary of the NAC.
2. The Acting Chairman of the NAC at this meeting was Herbert E. Gaston, Chairman, Export–Import Bank.
3. Ramsey Potts, representing the RFC.
4. Harlan Cleveland, Deputy Assistant Administrator for Program, ECA.
5. Reference is to discussions underway between the Bank and the Philippine Government regarding the Ambuklao hydroelectric project. In a telephone poll completed January 7, 1952, the NAC approved consideration by the Bank of a 20 year $20 million credit for this purpose at an interest rate of 4%. (NAC Document No. 88, Action No. 518; Lot 60 D 137)
6. M. S. Szymczak, Member of the Board of Governors, Federal Reserve System.
7. A new loan agreement incorporating these terms, not printed, was signed by Governor Cuaderno on behalf of the Philippines December 28. (NAC Document No. 1240)