832.10/11–754
Memorandum by the Director of the Office of Financial and Development Policy (Corbett) to the Assistant Secretary of State for Economic Affairs (Waugh)1
Subject:
- Brazil’s request for financial assistance.
Problem:
What is the financial position of Brazil, and is the new Government doing all that can reasonably be expected? Should the U.S. aid Brazil and if so what shall be the extent, timing and conditions of such aid?
Discussion:
In spite of recent borrowings it appears that Brazil’s supply of dollars will be inadequate over the next 12–14 months to meet maturing obligations and pay for essential imports, even on an austerity basis. According to figures brought back from Rio by Messrs. Knoke and deBeers, Brazil had at the first of November cash balances of $33.7 million and unused lines of credit of $19 million, a total of $54.7 million to meet an expected deficit of $84.3 million to January 1, 1954. Brazil, however, is about to receive $40 million from private N.Y. banks, and be relieved of $26.8 of payments due the Federal Reserve Bank of New York during this period. Also exchange earnings during [Page 663] the first 11 days of November have amounted to $39 million which is better than expected; the estimated deficit is based on earnings of $60 million per month.
Brazil will therefore probably have enough dollars to get through January and perhaps February. The swaps need not be reduced as rapidly as scheduled during the next few months, and there is a little flexibility in some other items, although not a great deal since a large portion of the payments are contractual obligations.
During 1955 the situation is similarly bleak, unless coffee and other earnings should be materially better than the $60 million per month estimated. The price of coffee has been falling and futures indicate a further substantial decline is expected, so that estimated earnings may not be realized. The dollar deficit for 1955 is calculated at $202 million, which does not, however, allow for elimination of payments to the Federal Reserve Bank of New York of $134 million, thereby reducing the deficit to about $68 million. Brazil is asking for an Eximbank loan of $100 million.
The new Government is doing well in measures to control inflation. The coffee policy, however, is essentially unchanged and involves internal price supports at a level which encourages withholding of coffee from export. The Brazilians seem to feel that larger exports would not result in larger dollar earnings. They, including perhaps Mr. Gudin, do not appear greatly concerned about the coffee policy, and assert that in any event for political reasons it cannot be changed until the next coffee year which begins June 30.
Similarly with respect to petroleum, we are told that for political reasons nothing can be done for some time, that the next Congress which convenes in March may be able to deal with it. Mr. Gudin recognizes the need for changing the petroleum law, but President Cafe Filho is, according to the Embassy, insufficiently aware of the seriousness of the exchange problem and the relation of coffee and petroleum to it.
If the U.S. bails out the new Government they will doubtless relax, and while the program to control inflation and to institute certain other reforms will go forward, it will lose steam and the tendency will be not to deal adequately with the main problems, particularly coffee and petroleum.
Recommendation:
The U.S. should extend aid to Brazil, but this should not be in one large sum. It should be extended piece-meal, and in each case without commitment as to further amounts, which would depend upon developments and Brazil’s progress in a constructive program. An initial sum might be granted in January if needed at that time and if other conditions are satisfactory.
[Page 664]We should discuss Brazil’s problems with the President, the Foreign Minister and Finance Minister, complimenting them on their measures to control inflation, but pointing out our difficulties in extending aid in the absence of a coffee policy which permits coffee to move in volume, and a petroleum policy which permits the development of petroleum resources. We should urge that they announce a new petroleum policy. We should tell them that it appears they will not need aid until at least in January, and that at that time we will consider aid for immediate needs, and that further amounts will depend upon developments. If the coffee and petroleum problems should be satisfactorily dealt with in the near future, and the need for aid existed the U.S. might then modify the piece-meal approach.2