832.51/1296: Telegram
The Acting Secretary of State to the Ambassador in Brazil (Caffery)
60. Your 90, April 23, 11 a.m. This press statement affords an opportunity to take the default question up with President Vargas in a more formal and pressing way than has recently been done, and to seek to forestall both immediate and eventual developments which would do widespread harm in the relations between the two countries.
Please see him in the presence of Aranha if you deem this desirable and state that you are instructed to say that in spite of the reasons he advances for the suspension of bond service, the opinion prevails both in financial and in bondholder circles in the United States that Brazil is able even at the present time to maintain some payment and indeed, according to many, the Aranha plan schedules on its foreign bonds. This is stated confidently in the quarters to which the public looks for financial information and advice and is readily believed in view of Brazil’s past record. The various statements from Brazilian authorities giving hope that bondholders organizations would soon be approached are also recalled. The pressure of dissatisfaction is intense and is scarcely diminished by the President’s statement regarding the [Page 380] temporary nature of the situation, which is qualified by an indication that there is some doubt whether the balance of trade will permit payments to be resumed at some later date or whether it will not be necessary to convert the bonds into obligations payable in Brazilian currency.
Opinion here was impressed by the change of coffee policy, and has noted the lower price of coffee but it understands that in the case of Brazil this is largely compensated by increased exports. The immediate details of the financial position are not known but it is appreciated that the import side of the balance of trade is largely within the control of Brazil and that increased or extraordinary imports could make it impossible to pay bond service. It is not perceived how conversion of the bonds into milreis would help the situation for the American bondholder, and it would greatly impair the marketability of his bonds. It is known that the Brazilian Government has been in contact with the Foreign Bondholders Protective Council, and it is not understood why if the Brazilian Government is concerned for the good opinion of the American bondholders it should not lay its position before the Council, discuss it in such manner as may develop, and put the Council in a position intelligently to formulate its own position vis-à-vis the bondholders who look to it for advice and for protection of their interests.
The United States Government does not know what action, if any, the Council, which may still be awaiting confirmation of press reports of the President’s statement, may be formulating. Some action will no doubt be found necessary in view of the Council’s responsibility to the bondholders and its need to retain and justify their confidence. The Department is concerned lest the Council’s action and the attitude it may find it necessary to take in the absence of full information about the financial problem and of any indication of willingness of the Brazilian Government to continue the negotiations already begun may result in a further and more definite alienation of American opinion on this issue and may make it eventually more difficult of mutually satisfactory solution. It is for these reasons that the United States Government, which itself finds difficulty in understanding the facts of the Brazilian situation and which recognizes considerable validity in the reasoning which prevails here, wishes to urge that the Brazilian Government take the initiative in reopening discussions with the Council in a way that will afford every possible reassurance to American bondholders and public opinion and will allow the Council its proper influence in the situation. It is believed that nothing but good could come from such action.
Please communicate the substance of the foregoing to the President and report the results by telegraph.