512. Letter From the Assistant Secretary of Defense for International Security Affairs (Hensel) to the Assistant Secretary of State for Inter-American Affairs (Holland)1
Dear Henry: I refer to our recent conversation and your letter of 22 March 19552 concerning the proposed purchase of two submarines by the Government of Peru on extended terms of repayment.
As you know, information available to this Department has been on an informal basis inasmuch as the Peruvians have utilized a representative of the Electric Boat Company to explore the possibilities of credit in connection with the proposed purchase. This matter and all related information obtained from the Electric Boat Company representative has been discussed between individual members of our respective staffs and at a recent meeting, called for this purpose, of the various interested governmental agencies.
Peru has four submarines which they purchased from the United States during the 1920s. Due to the age of these boats, Peru plans to decommission them in the near future. The two boats purchased last summer, paid for in cash during the period of construction, plus the two submarines they desire to purchase would allow the Peruvians to replace the older boats with modern type subs. As you know, Peru committed their recently purchased submarines to hemisphere defense tasks, and our understanding is that the two additional boats would also be committed to such tasks.
The estimated cost of the two submarines is approximately $15 million. Several financing arrangements have been mentioned which generally involve 6½ to 7 year terms with annual payments starting at the end of the second year. The terms of the contract would, of course, be subject to the National Advisory Council’s approval.
I am puzzled by the following statement which appeared in your letter: “the granting of credit for the purchase of military equipment on any basis other than the three-year short term credit under Section 106(b) of the Mutual Security Act of 1954 would constitute a departure from a policy long established and maintained by this government.” This appears at variance with NSC policy 5432/1,3 paragraph 20 e, which announced that the United States should facilitate purchase of US equipment (military) by offering [Page 1032] Latin American countries, among other things, “credit terms including long-term payments.”
This policy cannot be effectively implemented under Section 106(b) of the Mutual Security Act of 1954 which limits sales to “in-stock” items held by the Military Services and credit terms to a maximum of three years. However, Section 505 of the Act does provide loan assistance authority under certain conditions for the purchase of military equipment by friendly foreign governments. The contemplated purchase of two submarines by the Peruvians can be authorized under this section of the Act.
It is not the view of this Department that the extension of long-term credit to Peru for the purchase of two submarines immediately necessitates establishing blanket credit authority of any amount to finance purchases by other Latin American countries. This Department intends to consider on a case-by-case basis requests from other Latin American countries, each request to be analyzed on its own merits, including the intended use of the equipment by the recipient country, the quantity, the country’s ability to repay, funds available within our government, etc.
I am of the conviction that credit terms to countries with the ability to repay for military equipment which will support US objectives and strengthen hemisphere defense should be encouraged, and this Department will lend its full support to such meritorious requests. Unless we initiate a program for the further implementation of NSC policy, we can expect Latin American countries to look more and more to European sources with the subsequent trend toward European military training and technical advice. In my view, such a trend is in direct contradiction to our national policy.
I urge your favorable consideration in this matter. With your concurrence, I propose to inform the Electric Boat Company to advise the Peruvians to submit a formal request for the purchase of two submarines through diplomatic channels.