832.51/2210
Memorandum by the Second Secretary of Embassy in Brazil (White)26
The attached memorandum,27 presented to the Brazilian Government and Embassy yesterday, constitutes the comment of the British Corporation of Foreign Bondholders in regard to the suggested bases for discussion prepared by the American representatives and submitted to the negotiating group on September 20 and 22.
An examination of its contents, with the elimination of “smokescreen” elements, reveals the fundamental difference in principles which created such a wide separation between the creditor nation[s] in 1934 and 1940, and which, it is now clear, constitutes a major impediment to a permanent settlement of Brazil’s external funded debt. The British suggestions are designed, through sharply increased interest rates and the concentration of amortization, to bolster the funding and coffee realization issues to the point where their owners would eventually recapture their original investment. In view of the limited total debt service available, this could only be accomplished by severe reductions in interest payments to the holders of federal unsecured, [Page 775] state and municipal bonds. Furthermore, the channelizing of amortization would leave the market for the latter group of bonds with a greatly restricted “cushion” and the eventual severe loss on the original investment would constitute an unwarranted degree of sacrifice by their holders.
The American suggestions, in contrast, adhered to the well-known Brazilian axiom that “when it rains in Brazil everyone gets wet”. It was recognized that there were qualitative differentials as between issues, based on differences in the original risk element, but it is believed that these were fully compensated by the regrouping plan suggested.
It is impossible at this point in the negotiations to indicate whether the British and American approaches can be reconciled. Further exploration, however, may point to the need for a British-American agreement as to the percentages of Brazil’s total interest and amortization payments which should be allocated to sterling and dollar bonds, respectively. This would then permit the American representatives to suggest a distribution of the dollar bond share on an equitable basis as between groups of issues. The British Council would then be free to enrich their funding and coffee realization bondholders (it would be interesting to know who they are) at the expense of the other sterling bondholders.