Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

398.13/9–1254:Telegram

The Ambassador in Brazil (Kemper) to the Department of State

confidential
priority

Rio de Janeiro, September 12, 1954—10 p.m.

278. Pass Treasury, Federal Reserve Board and Export–Import Bank. From Holland.¹ Full extent extremely critical financial situation Brazil (reference Embassy telegram 270 September 9²) resulting from disastrous coffee price support policy and other mistakes of previous government became clear to new administration only last few days. Actual magnitude although feared by technical experts including Embassy owing to sales of dollar exchange for delayed delivery without certainty of cover (see Embassy economic Weekas and financial reports) was not available statistically prior our lengthy discussion with Finance Minister Gudin³ and staff. Problem breaks down:

(1) Immediate situation to be faced in September; and (2) situation which will become increasingly critical during October–December 1954 and in 1955.

Brazil confronted with immediate crisis in foreign exchange position involving sale of gold if new Federal Reserve gold loan is not granted. Brazilian authorities believe that if they are obliged to sell gold domestic political consequences would be severe if not unbearable to present administration which is trying to gain support to face financial crisis and take necessary measures reorient economic policy.

Brazilian officials assert, however, government would sell gold before defaulting exchange contract. Domestic effects indicated are (1) bears would enter coffee market with resulting reduction sales; (2) commercial bankers reduce credit lines; (3) severe political blow prestige and popular support of present administration. Moreover refusal US grant gold loan forcing sale elsewhere would diminish US influence new administration impairing our ability persuade Brazil take sound economic measures including opening oil development private enterprise.

Following is estimated dollar exchange position for September and following three months on cash basis.

Receipts (estimated)		September 1954	October–December 1954
Exports		60	180
Drawings on bank lines (net)		–5	93
Other		5	0
	Total	60	273.0

Expenses for which exchange is closed or promised

Export–Import loan		4.2	12.6
FRB loan		0	80.3
Swaps (net)		2.5	6.4
Petroleum		12.1	78.6
Imports with exchange closed		39.2	42.0
Exchange certificates in circulation—estimated closings		40.0	64.0
Government commitments		9.2	25.2
Letter of credit, Brazil Light and other		18.1	18.7
	Total	125.3	327.8
Deficit (minus)		–65.3	–54.8

To foregoing should be added government imports and newsprint for which exchange must be made available as follows: September 1.2 million; October–December 15.6 million.

Above represents considered opinion of Ministry Finance and Joao Dantas, director exchange department Bank Brazil. However, Dantas suggested that September crisis could be mitigated by following developments which could not be promised or assured. Receipts: Exports at extreme might reach 70 million (although Embassy believe negligible chance exceeding 60). Drawings on bank lines could rise by 30 million producing net receipt from that source of 25 million. Swaps might not be reduced thus providing additional net income of 5 million rather than net expenditure of 2.5 million. Expenditures: All exchange certificates in circulation might not be presented for closing exchange contracts, reducing 40 million figure to perhaps 30 million. Thus on unexpected favorable turn of events, and robbing remaining months of year to improve September position, deficit might be reduced to 9.0 million. Nevertheless some sale of gold probably still necessary if FRB loan not extended or other sources of credit not found.

October–December picture made acute by obligation to repay existing FRB credit in October. Attempts to alleviate September position while awaiting reply on request for new credit would heighten difficulties in last three months of year as against figures shown in above table.

1955 prospects. Brazil figures for this period which are being airmailed show deficit of 155 million in first six months and 90 million in last six months. These figures assume continuation sale 120 day forward exchange against general imports, 90 days against petroleum and for varying and longer periods against certain services. No wheat imports from dollar area have been provided for although every indication of need for wheat from US or Canada in amounts of about $3 million per month. Dollars to be provided in auction markets 20 million a month commencing in September with exchange to be delivered in January and thereafter.

Brazilians have proposed medium-term loan of $341 million to be available in November or shortly thereafter to pick up deficit as outlined above and to pay off 62 million of bank lines. This would not place Brazil on current basis but would continue 120 and 90 day sale of exchange certificates.

Brazilians request informal. We made no comment beyond clarifying supporting figures. Suggest matter be considered exhaustively with Minister Gudin who arrives Washington September 21. Methods for handling late 54 and 55 deficit far more varied than September deficit and final decision should await disclosure much additional information and appropriate Brazilian action and commitments regarding which Embassy will comment fully.

Am impressed Gudin’s ability and sincerity. He asserts willingness continue office until end of present administration and claims full Presidential support combat inflation and institute sound fiscal policies. President personally confirmed this to me and stated will continue present Cabinet regardless outcome October elections. I feel careful analysis present crisis may reveal opportunity achieve reversal long period fiscal folly, institution sound petroleum program and consolidation in power of solidly pro-US Government.

My recommendations (1) feel situation warrants decision before Gudin’s arrival Washington that, if necessary, up to full new 80 million gold loan will be granted and (2) full discussion by Washington authorities with Gudin with decision to be made then concerning renewal of old 80 million loan, amount new money required, and arrangements for repayment of such FRB credits as may be then outstanding.

I strongly urge no publicity and express no opinion US domestic political implications.

Kemper

1. Between Sept. 5 and Oct. 10, 1954, Assistant Secretary Holland visited the countries of South America and Mexico for the purpose of discussing with Latin American leaders the policies developed by the United States in preparation for the Rio Economic Conference; pertinent documentation is in file 110.15 HO for 1954.
2. The referenced telegram, which contains the text of a telegram from the Bank of Brazil to the Federal Reserve Bank in New York City, is in file 398.13/9–954.
3. Eugenio Gudin.