832.51/2315
The Department of State to the British Embassy
Aide-Mémoire
The terms of the British Embassy’s aide-mémoire of November 2, 1943, regarding the negotiations now in progress in Rio de Janeiro looking to a permanent settlement of the Brazilian sterling and dollar bonded indebtedness, indicate some possibility of misunderstanding which may arise from the wartime difficulty of prompt full communication over the distances involved.
It was reported to the Department of State from Rio de Janeiro in December 1942 that Mr. John Phillimore, who had just returned from consultations in England, was about to initiate discussions with the Brazilian authorities looking to a readjustment of the Brazilian foreign bond service without awaiting the expiry of the current temporary service scheme on March 31, 1944. Mr. Phillimore’s conversations continued until June 1943 without attempt to obtain, either directly or through the American Embassy at Rio de Janeiro, the views of the American Foreign Bondholders Protective Council. This procedure appears to have been more or less in conformity with [Page 787] precedents followed in the development of the temporary plans of 1934 and 1940. In June 1943, the American Embassy was informed by the Brazilian Minister of Finance that he and Mr. Phillimore had been exploring the debt situation in an effort to find a mutually satisfactory basis for negotiation and that the interests of American bondholders would be protected. On inquiry by the American Embassy, Mr. Phillimore confirmed this and stated that he had given a commitment to keep the tenor of the conversations secret. Draft proposals emanating from these discussions were communicated to the American Embassy on June 21, 1943, and first reached the American Council in full textual form on July 22.
The President of the British Council had addressed to the American Council a letter dated June 19, 1943, which, so far as the Department of State is informed, was his first communication to the American Council regarding the negotiations with the Brazilian Government. The draft proposals communicated in June comprised two options. The first option called for interest (except for a slight deviation in one issue) of 70 percent of the interest rate payable in the last year of the 1934 temporary service plan. The British Council’s letter appears, inter alia, to have expressed a doubtful hope that this basis could be raised to 75 percent.
After study, the American Council decided to seek improvement of the offer in various regards, and notably by raising the interest rates at the expense of the amortization and by correcting what it had always regarded as discriminatory and unjustified preferences given the five percent funding loans and the São Paulo Coffee Realization Loan. Calculations showed that the June proposal allocated to these issues, outstanding in par value equivalent of some $162,000,000, interest of $6,000,000 and amortization of $6,200,000, leaving interest of $11,600,000 and amortization of $5,700,000 for the remaining approximately $700,000,000 par value of other Brazilian bonds.
The American Council dispatched representatives to Rio de Janeiro who, after making contact with Mr. Phillimore and after a first preliminary meeting with the Brazilian negotiators on September 16, have engaged in a series of official meetings with them in which Mr. Phillimore has participated. At the fourth meeting on September 20 by request of the Brazilian delegates, they submitted a draft schedule of payment which became the basis of discussion. After much discussion and exchange of proposals and counter-proposals, a modified version proposed by the Brazilian negotiators was initialed on October 16 by them, by the American negotiators and by Mr. Phillimore, the latter making an oral reservation to the effect that he doubted the British Council would accept the arrangement and that they would [Page 788] not accept it unless there were heavy amortization for the funding and coffee realization issues.
The schedule of interest rates thus approved represented an overall increase of some 20 percent over the interest offered in June and considerably greater increases for bonds other than the funding and coffee realization bonds. The 3½ percent rate for the coffee realization bonds, which is the rate they currently receive, was set by the Brazilian negotiators as the highest rate Brazil is prepared to offer upon any bonds under the first option, which involves no decreases in principal. The three percent rate on the funding 5s, which also corresponds with what they are currently receiving, represents the highest percentage of original contract rate that has been granted to any loan.39 As the result of substantial concessions made to the British position during the negotiations, the interest schedule represented 41.6 percent of contract rates on dollar bonds and 43.3 percent on sterling bonds. In view of the insistence of the British negotiator on high amortization of the fundings and the coffee realization loan, which would be impracticable on an overall basis, it was agreed that there should be separate amortization schedules for the dollar and sterling issues and the total amortization fixed at $9,225,000 was divided in the proportion of 34.2 percent for dollar bonds and 65.8 percent for sterling, these proportions corresponding to the principal amounts now outstanding in the respective currencies. This basis of division which gives sterling bonds $989,000 more in annual amortization under the October 16 agreement than they were entitled to under a division based on contract provisions was conditioned on British acceptance of the interest schedule provided in the October 16 agreement.
The American and Brazilian negotiators have agreed on the bases on which the amortization quota will be divided among the dollar issues; it is left to the British Council to determine the amortization distribution for sterling bonds. The American negotiators have accepted this arrangement only with reluctance and of course have not been in a position to concede similar freedom of separate action on interest rates where different rates for sterling and dollar bonds would provoke public reaction destructive of the good will the debt settlement plan would otherwise create.
It was in this posture of events and while the Brazilian Minister of Finance was pressing to complete the negotiations in the following week that he was told by Mr. Phillimore on October 31 that discussions were under way between the British and American Councils and that no action should be taken at Rio de Janeiro until the results [Page 789] were known. This is the Department’s information most nearly corresponding to the statement in the British Embassy’s aide-mémoire that the Brazilians have told the British negotiators that the British and United States negotiators must resolve their own differences between themselves before they can do more.
The American Embassy at Rio de Janeiro has already been informed, and has informed the Brazilian Minister of Finance, that the Department of State strongly shares the opinion that the undue preferences proposed for the funding and coffee realization loans could not be sustained before the public in comparison with the terms agreed upon October 16 and that the Department will urge that a separate agreement covering the dollar bonds, duly protected by a most favored nation clause, should be proceeded with in case a joint agreement should be made impossible by disagreement over this point, which has appeared to be the only one seriously in controversy in any quarter.
It is understood that negotiations in Rio de Janeiro are still proceeding, although the last minute delay interposed by the British Council has seriously endangered the possibility of making an agreement effective on January 1, 1944. Delay of the effective date to April 1, 1944 would involve a substantial sacrifice of interest by bondholders.
- A marginal notation initialled “FL” opposite this sentence reads: “error, current rate was 2.5%.”↩