832.51/2237: Telegram
The Ambassador in Brazil (Caffery) to the Secretary of State
[Received 12:55 p.m.]
5106. Department’s 4037, October 29, 2 p.m. Following their telephone conversation with Department yesterday, I sent two members of my staff to see Souza Costa.
The Finance Minister was given a memorandum summarizing first two paragraphs Department’s telegram and he was informed orally of general line of policy expressed in third paragraph and that American Council was not disposed to agree to a modification of October 16th agreement to permit 3⅛% for the fundings. The following understanding was reached:
Souza Costa will call in Phillimore today. He will tell him (1) that the October 16th agreement will be adhered to; and (2) that if the British will accept the agreement, the Finance Minister will request the State Department to obtain American Council consent to a rate of 3⅛% for the fundings. To strengthen his presentation, the Finance Minister will point out to the British representative that American agreement to division of amortization on basis bonds outstanding instead of contract was a concession contingent on British acceptance October 16th agreement and that failure of this agreement would result in sterling bonds receiving less amortization. Inasmuch as Phillimore told Souza Costa on Friday that he thought McCormick and Orton were bluffing, Finance Minister also intends to point out firm position of State Department as per our memorandum.
With reference to ⅛% increase in fundings, Embassy comments as follows (Orton is in full agreement—McCormick is out of town temporarily):
- A
- —Parity between dollar and sterling issues—September 20th schedule was generally regarded as establishing parity. October 16th agreement with 3⅛% for all 8% bonds in category A represents on bonds now outstanding 96.8% of September 20th schedule for dollar bonds as a group and approximately 96% for sterling bonds.
- B
- —Equity between issues—while it is true that modification suggested does not maintain the same precise relationship between issues in category A that we have for other categories, the gradation of 3⅛% for 5’s, 3⅜% for 6½’s and 34/8% for 7’s and 8’s appears justifiable, particularly when compared with Aranha plan.
It is doubtful whether British Government is aware of principles involved and implications of British Council’s position. Now that the Department has decided upon its strong stand, as per telegram under reference, it becomes especially important that all the facts [Page 784] be laid before the British Embassy in Washington for communication to London.
If British Council rejects Souza Costa’s solution we are faced with a difficult problem because the Finance Minister has no intention of including sterling issues in his Decree-Law unless British Council will recommend to bondholders. His position on this is that unilateral action would cost him 60% more on his sterling bonds than the present arrangement without corresponding benefits in financial prestige.
Souza Costa expressed desire to complete negotiations this week. (It is probable that he hopes to announce debt settlement on occasion official opening new Finance Ministry building November 10th.)
Please keep Council in an active status during next few days. The Finance Minister has promised us a report tonight or tomorrow morning on his conversation with Phillimore.