Foreign Relations of the United States, 1955–1957, Foreign Economic Policy; Foreign Information Program, Volume IX

109. Memorandum From the Secretary of the National Advisory Council on International Monetary and Financial Problems (Glendinning) to the Members of the Council¹

Document No. 1784

Washington, May 5, 1955.

SUBJECT

• Terms of Loans—P.L. 480 and P.L. 665

The terms approved by the Council for loans under the Mutual Security Act (P.L. 665) and the Agriculture Trade and Development Assistance Act (P.L. 480) provide for a minimum interest rate of 3 percent if interest and amortization payments are in dollars and 4 percent if in local currency. Loan agreements providing for local currency repayment permit the borrowing government to transfer irrevocably at any time to a dollar basis of repayment at the lower rate of interest thereafter. Largely as a result of developments during the negotiations on a P.L. 480 loan to Japan, certain questions have been raised in the Staff Committee regarding these loan terms which should be submitted to the Council.

The questions are as follows:

1. Should the borrower’s option as to currency of repayment be modified to give the borrower the right to choose the currency in which any particular payment will be made and to apply the appropriate interest rate on each such payment? The present arrangement permits the borrower to select the currency of repayment at the beginning of the loan contract, but permits him to change only from local currency to dollars, and as a condition of receiving the lower interest rate, requires him to agree to make all future payments in dollars.

2. If the loan terms are modified with respect to the repayment option, should such modified terms apply only to loans under P.L. 480 or to loans under P.L. 665 as well? There are several differences between the two programs. Perhaps the principal one is that P.L. 480 loans are made in local currency derived from the sale of surplus commodities, while P.L. 665 loans are made in dollars as part of aid programs. This might argue for more lenient terms for the P.L. 480 loans. On the other hand, borrowing governments often expect equality of terms as between the two types of loans and might resist more stringent terms in the case of P.L. 665 loans. Moreover, there are considerable administrative advantages in standardizing the terms on both types of loans.

3. A related issue, which is not directly raised by the Japanese negotiation but which deserves mention, is the possibility of reducing the minimum interest rates on these loans. Reduction of the minimum levels below 3 and 4 percent, while retaining the spread as between repayment in dollars or in local currency, has been suggested. It has also been suggested that it would be preferable to abandon the differential between the rates and to charge 3 percent on all loans regardless of the currency in which repayment is made.

1. Source: Department of State, NAC Files: Lot 60 D 137, Documents. For NAC Use Only.