Foreign Relations of the United States, 1955–1957, Near East Region; Iran; Iraq, Volume XII

375. Memorandum of a Conversation, Washington, January 3, 1957, 10:30 a.m.¹

Washington, January 3, 1957, 10:30 a.m.

SUBJECT

• Export-Import Bank Board Meeting re Iranian Proposal to Meet Negative Pledge Clauses of Exim Loan Agreements

PARTICIPANTS

• ICA:
  • Hale Shenefield
  • Carter Ide (Iranian Desk Offer)
• State Department:
  • Jack Corbett—OFD
  • Murat Williams—GTI
  • Francis Lincoln—GTI
  • Harry Smith—GTI
• Eximbank:
  • Lynn Stambaugh—Exim Bank Board Member
  • Hawthorne Arey—Exim Bank Board Member
  • George Blowers—Exim Bank Board Member
  • Vance Brand—Exim Bank Board Member
  • Harry Rountree—Chief Economics Division
  • Arthur Lord—Counsel
  • Rodney French—Loan Ofcr.
  • Edward Houston—Economist
  • Raymond Jones—Chief, Loan Division
  • Sidney Sherwood—Secretary

At the invitation of the Export-Import Bank, representatives of ICA and the State Department were present at an informal Bank Board meeting, Thursday, January 3, 1957 (10:30 to 11:30 a.m.). This meeting was devoted to considering the Iranian proposal presented to the Bank by the Iranian Ambassador on December 26, 1956. The proposal was advanced to meet the requirement of the negative pledge clauses of Exim loan agreements for equal and ratable security in view of a pending specific pledge of certain oil revenues to the IBRD to secure a $75 million loan. Exim credits so far extended comprise $19 million from its funds and $42 million from ICA funds; $34 million of additional credits are available to Iran from Exim funds during CY 1957 for suitable projects.

Mr. Stambaugh opened the meeting with a review of the history of the Exim Bank credits to Iran and the relation of the negative pledge clauses to the pending IBRD loan. Discussion then centered about the proposed solution and the comments of Mr. Arthur Lord (Bank counsel) contained in his memorandum dated December 31, 1956.² While Mr. Lord’s memorandum sets forth the problem in detail, it is briefly summarized in attachment No. 1 to this memorandum. Basically, the Iranian proposal fails to meet the equal treatment of the Exim negative pledge clauses because the IBRD loan will have twice the security given the Exim loans.

Messrs. Williams and Corbett led the discussion for the State Department representatives. The Department would be pleased if the Bank found that the Iranian proposal met the requirements of the negative pledge clause, but the decision rested with the Bank. There are no over-riding political considerations causing us to urge favorable consideration.

The Bank decided to call in the Iranian Ambassador in the afternoon. He would be told that the Iranian proposal is a constructive suggestion opening the door to a solution of the problem. A counter proposal would then be made that all oil revenues (both Midland accounts) be pledged to secure jointly the IBRD and the Exim loans with the understanding that Iran may actually service the loans from separate accounts (as proposed by Iran). Thus, both sets of loans would be equally secured.

The ICA representatives indicated agreement to this line of action.

Note:

The Eximbank meeting with Ambassador Amini occurred as scheduled on January 3. The Ambassador stated that the counter proposal was impossible to accept for legislative and political reasons. He urgently requested reconsideration as an exceptional matter. The Bank agreed to reconsider the original proposal.

Attachment No. 1

SUBJECT

• Iranian Proposal of December 26, 1956 to Meet Negative Pledge Clauses of Exim Loan Agreements

The proposed solution presented to the Exim Bank by the Iranian Ambassador involves pledging oil revenues representing the share of the Plan Organization to the IBRD to secure a pending $75 million IRBD loan and pledging the remaining oil revenues to secure the Exim Bank loans. In practice, the oil revenues are paid to the Midland Bank into account “G” for the Plan Organization and “O” for Iranian Government and NIOC.³

The coverage of the IBRD loan service under this arrangement would be at a ratio of 7 to 1, while coverage of Exim Bank loan service would be 3½ to 1.

While the manner in which Iran Government proposes to effect these two pledges would require certain technical modifications, the major problem arises from the difference in coverage ratio. The 3½ to 1 ratio taken alone would be satisfactory, especially since it would steadily improve as interest charges were reduced by semi-annual payments of principal. However, there remains the question of the Exim Bank accepting security less satisfactory than that given to the IBRD.

A possible solution of this question of principle would be to give the IBRD loan and Exim loans an equal and ratable pledge of accounts “G” and “O” as a whole; then, as an internal matter, the Iranian Government could arrange to have service of the IBRD and the Exim Bank loans made from separate accounts in accordance with the original Iranian proposal.

1. Source: Department of State, Central Files, 398.14/1–357. Confidential. Drafted by Smith.
2. Not printed, but see footnote 3 below. (Ibid., GTI Files: Lot 59 D 3, Export-Import Bank, 3.212–A)
3. The distinction between these two accounts is spelled out in more detail in Lord’s memorandum to the Board of Directors of the Export-Import Bank, December 31. These two accounts in the Midland Bank in London represented the deposit of income taxes paid to Iran by the eight oil companies of the Consortium, in effect, Iran’s major oil revenues. In the Midland Bank these payments were segregated into two accounts: “G” would receive 60 percent of the amounts deposited until March 1958 and 80 percent thereafter until March 1963. Account “O” would receive the remainder, 40 percent until March 1958 and 20 percent thereafter until March 1963.