Very little new information has been given in the memorandum. The
different statements regarding the intention of the Peruvian Government
to settle the debt along lines which are equitable and in proportion to
the economic possibilities of the country, capacity to pay, and in line
with the fiscal conditions of the Republic, etc., represent a
recapitulation of statements by the Minister which have been reported on
various occasions.
It makes a point also of Mr. East’s mention of newspaper publicity to the
effect that the Latin American nations together have a favorable trade
balance of about two billion dollars, and that Peru possesses only a
very small portion thereof.
Emphasis again is placed on Peru’s relatively small foreign exchange
accumulation during the last four years, amounting to 17.4 million
dollars, which was not due to the sale of Peruvian products abroad but
rather to the sharp restrictions on imports.
It states that at Mr. Rogers’ request an investigation was made regarding
the holdings of commercial banks. The resulting figures showed a total
of 9.4 million dollars, represented by refugee money subject to
withdrawal at any moment, and other funds subject to constant
fluctuation on account of ordinary merchandise requirements.
The next point is one which the Peruvians use more persistently than any
other. They always state that an appreciable part of their favorable
balance is the property of foreign companies which does not return to
the country. Without stipulating the sum involved, they assert it should
be subtracted from the apparently favorable balance, and this leaves a
negative result. Taking the year 1943 for example, the Minister’s
memorandum shows a favorable balance of 1.7 million dollars to which, it
is admitted, the value of certain quantities of acquired but unshipped
cotton and sugar should be added; but that even then the exact balance
of payments is not reflected, because of the importance of the products
owned by foreign companies. It is stated that all of these facts were
explained in detail to Mr. Rogers and in Peruvian opinion were
satisfactorily corroborated with trustworthy information.
. . . . . . . . . . . . . .
Reference is then made to the temporary suspension of conversations and
the plan to renew them on a date fixed in agreement with Ambassador
Beltrán following the international monetary conference. The memorandum
ends with this statement: “Peru reiterates its desires to find a
definite solution of the external debt problem, but believes that it is
to be found only and solely in the field of economic reality”.
The memorandum represents a report by Mr. East to the Council, and in
addition to submitting copies to the Department and this Embassy, one
was sent also to the British Embassy. It is evident that the Finance
Minister has failed to bring to the attention of his colleagues numerous
important points on the other side. He has not stressed the exceptional
advantages which have accrued to Peru by virtue of several overall
agreements assuring secure markets for Peruvian products at prices two
to four-fold greater than the pre-war level. This style of presentation
is what we would have expected and must expect, for it is now evident
the Peruvian Government has done little even after the United States had
absorbed or underwritten the greater portion of Peru’s export products
during the two-year period. Nor is there any assurance of a satisfactory
settlement if
[Page 1586]
we should be
so generous as to continue the same type of cooperation for an
additional two, four or eight-year period.
The experience of American, British and other foreign businessmen in this
country, and also of the foreign governments which have been successful
in dealing with Peru, is that this Government’s practice of giving too
little and asking too much can be modified only by very firm and, of
course, friendly bargaining.
[Enclosure—Translation]
Memorandum
With respect to the conversations that have been held with Mr.
Rogers, we think it appropriate to give an account of what took
place.
The purpose of the first four meetings was only to explain to Mr.
Rogers Peru’s economic situation and its ability to pay. This would
have to form the basis of any conversations and possible settlement
under the terms accepted by the Foreign Bondholders Protective
Council. In fact, in a cable dated December 18, 1943, the President
of the Council stated to the Minister of Finance: “We were happy to
learn through Mr. Orton that Your Excellency hopes to be prepared to
discuss the question of the Peruvian dollar debt in January. We
shall be pleased to begin these discussions when Your Excellency
informs us that the Peruvian Government wishes to do so. Meanwhile,
we should appreciate it if we could be informed about the proposals
that will serve as a basis of the discussions. Very truly yours,
Dana G. Munro.” This cable was answered on the 21st of the same
month by the Minister of Finance, who stated: “In reply to your
cable dated the 18th of this month, I take pleasure in confirming
what I have stated to Mr. Lee Orton: that the Government of Peru was
prepared to initiate conversations in Lima on the question of the
foreign dollar debt in January and, with regard to the second matter
mentioned in your cable, I must confirm my letter to you dated May
5, which stated that ‘it has always been the aim of our Government
to obtain a solution that is fair and in accord with the economic
capacity of our country.’ Very truly yours, Julio East, Minister of
Finance.”
It was also stated in the last paragraph of a memorandum sent by the
Embassy of the United States on the 14th of the same month: “It is
hoped in Washington that any proposal that Peru may make to American
bondholders will be based on Peru’s ability to pay.”
In determining the country’s ability to pay two basic factors were
taken into consideration: the possibility of transferring funds
abroad in order to make the payments and the financial situation of
the country as shown by its budget.
[Page 1587]
From the information that is constantly being received from the
United States it was learned that there was a general impression in
that country that all Latin American countries have accumulated
large gold and foreign currency reserves during the last four years
because of favorable foreign trade and that the amount accumulated
would come to a little over two billion dollars. This figure, given
thus as the sum total, has led to the assumption that each and every
one of the countries, including Peru, has a large sum in gold and
foreign exchange. However, the amount accumulated has been much
larger in some countries than in others. If we take into
consideration the fact that on December 31 last, Argentina had a
little over 800 million dollars, Mexico 700 million, and Brazil
approximately 460 million, it may easily be seen that the other
Latin American countries combined did not have as much as 200
million dollars in gold and foreign exchange.
At the first meeting held with Mr. Rogers on April 19 last a report
on the above-mentioned situation was made to him, and he was
provided with official information on the gold and liquid assets
payable in gold of the Central Reserve Bank of Peru as of December
31, 1939 and April 15, 1944. From that information it appears that
at the end of 1939, Peru had the sum of 9,595,201.22 soles in gold
and foreign exchange which, at the exchange rate prevailing at that
time, amounted to the sum of U.S.$1,744,582.04, whereas on April 15
last, it had 124,081,101.97 soles, or U.S.$19,133,554.66 at the
present exchange rate of 6.50 soles per dollar; that is to say, not
only does Peru not have a large gold reserve and large liquid assets
for foreign exchange but also, during the last four years, unlike
other countries, it has been able to accumulate only the sum of
U.S.$17,388,972.62. The fact that this amount has been accumulated
is due not so much to sales of our products abroad at very favorable
prices as to heavy import restrictions.
Since Mr. Rogers had requested information on commercial bank
holdings, he was provided with the data furnished by the Office of
the Superintendent of Banks, which showed a balance on hand of
60,855,441 soles, or the equivalent of U.S.$9,362,375, with the
explanation that these sums comprised not only floating funds that
had come into the country and might leave it at any time but also
sums subject to constant fluctuations caused by the daily import
transactions.
Even more important than the foreign exchange position at any given
time is the tendency shown by the trade balance and the balance of
payments, since they indicate the true economic situation over a
long period. There has also been a serious misconception abroad
concerning our trade balance, which has been caused by the
apparently favorable trade balances. If we analyze the matter a
little and note that a large part of our export products are owned
by foreign
[Page 1588]
companies, we
can see that their net value does not return to this country.
Therefore, that amount must be deducted from the foreign trade
balance, which thus has actually been negative on various occasions
although appearing to show a plus or favorable position. Thus, in
1943 there was a favorable foreign trade balance of only 10,951,458
soles, or U.S.$1,684,839, to which could be added the value of
certain quantities of cotton and sugar that were sold but not
shipped. However, these sums would not accurately show the situation
with respect to the balance of payments, since it would be necessary
to deduct the value of products owned by foreign companies that does
not return to the country. Studies made concerning Peru’s balance of
payments in 1932, 1933, 1938, 1939, and 1940, even though they are
inadequate, and the preceding comments on our foreign trade clearly
indicate that our balance of payments has a tendency to be
unfavorable.
All these explanations were carefully made to Mr. Rogers during the
first two meetings and were, we think, adequately corroborated by
reliable information. It appears, then, to have been shown that
since Peru has available only small amounts of foreign exchange and
its balance of payments has not been consistently favorable for many
years, its ability to transfer funds for service on the debt would
be extremely limited.
This situation is even more serious if we consider what the future
holds for our export products. Peru depends on its exports as much
as or more than any other country in the world. If we find that we
cannot continue to sell our products abroad or to receive the same
price for them as at present, it is evident that our domestic
economic situation will worsen, and, since the importation of
capital goods cannot be further restricted, our balance of payments
would obviously be unfavorable. Therefore, we sincerely believe that
any settlement must be based on the possibility of transferring
funds, as measured by the balance of payments.
At the third and fourth meetings with Mr. Rogers information was
furnished on Peru’s ability to pay, as measured by its tax revenues
and its urgent needs that must be met by the budget. Mr. Rogers was
provided with data on the budgets from 1899 to the current year,
which showed that up to 1939 the exiguous tax revenues had been
sufficient to meet only a few of the more urgent needs and that it
was not until the last five years that revenues increased because of
an improvement in the economic situation; however, they were
absorbed by the aforesaid needs, which even so could not be fully
satisfied. It was explained to Mr. Rogers that in actual value this
increase was less than one might infer from the mere figures since,
if it were converted into dollars, only this year’s budget was
higher than that for 1929, the year of the beginning of the crisis
that led to suspension of
[Page 1589]
payments on the debt. He was also given data on the fluctuations
in the yield of various taxes and on how the budget has been worked
out, its structure having been improved year by year in order to
establish a better financial policy. It was also pointed out that
this improvement in national finances was due to an improved
economic situation, which in turn was dependent on the sales of our
products abroad, but nonetheless that did not mean that it would be
possible to have a large sum available for foreign debt payments,
since that would mean neglect of essential public services.
At the meeting held with representative of the Foreign Bondholders
Protective Council on May 8 last, after fixing by mutual agreement
the debt of the Government, the Municipality of Callao, and the
Municipality of Lima in 1911 at U.S.$92,602,584, and stressing the
country’s ability to pay as brought out in the earlier
conversations, it was proposed to Mr. Rogers that one sol for each
dollar, or 92,602,584 soles, be paid and that this debt be reduced
at [the exchange rate of] 6.50 soles [per dollar], or to
U.S.$14,246,551.00. No reference was made to the payment of the
interest due or to interest payable in the future, even though it is
the impression of the Peruvian Government that the first interest
due should be forgiven and the second reduced.
The proposal made to Mr. Rogers was entirely in accordance with the
agreement that had been reached to make any settlement dependent
upon Peru’s ability to pay, which ability is limited by its tax
revenues and the possibility of transferring funds abroad.
It would not be superfluous to call attention to the fact that Peru’s
proposal, as was stated to Mr. Rogers, is not only based on the
country’s actual ability to pay, but it is also not unique or
without precedent. Nearly all countries that have resumed payment of
their debts have done so by obtaining reductions in the capital or
interest in proportion to their ability to pay. Thus, for example, a
few months ago Chile made an arrangement with the National City Bank
of New York canceling Treasury notes amounting to U.S.$11,845,000 by
paying them in internal debt bonds at the rate of 6.50 pesos per
dollar, when the present rate of exchange is 31 pesos per dollar;
that is to say, this represented a reduction of nearly 80%. Mexico,
another country with greater economic capacity and development than
Peru, settled its foreign debt two years ago, converting it from
dollars into pesos after obtaining in advance another reduction in
its peso debt, all of which meant an 82% reduction in the total of
its debt.
It is our intention to resume service on the debt at a rate that can
be met year by year until it is fully paid, for, without study and
careful consideration, we should not like to set an excessive
amount, which would lead to cancelation of the agreement or another
suspension of debt service.
[Page 1590]
During the conversations Mr. Rogers stated that he had confidence in
the future of Peru and that a risk should be taken, but the Minister
of Finance pointed out that that was the procedure followed in 1927,
when the loans were contracted without studying Peru’s real economic
situation or its ability to pay at that time or in the future. This
resulted in suspension of the debt service in four years and from
the first year payments were kept up only with the product from the
loan itself, which showed that even in the year in which the loan
was contracted, Peru did not have the economic capacity to meet the
service on the debt.
At the next meeting on the 9th of this month, Mr. Rogers stated that
the Foreign Bondholders Protective Council had not accepted the
proposal of the Minister of Finance, and he made several
suggestions, one of which was to suspend the conversations
temporarily until some time in the near future, when they would be
resumed. Meanwhile, he would have to report to New York and
Washington on Peru’s economic capacity and communicate the
information that had been given to him.
In a few days Mr. Rogers requested a conference with the Minister of
Finance, informing him that he had made a reservation to return to
the United States by plane the next day. At that last meeting Mr.
Rogers’ suggestion was accepted, to the effect that the
conversations be suspended for a short time and resumed at a date to
be set by common agreement through Mr. Beltrán, our Ambassador at
Washington, after the International Monetary Conference ends.
Peru reaffirms its desire to obtain a definitive solution of its
foreign debt problem, but it believes that a solution will be found
only on the basis of its actual economic situation.
