816.51/1137
The Secretary of State to the Minuter in El Salvador (Thurston)
Sir: The Department refers to its telegram no. 56 of March 25,52 informing the Legation of the prospective dissolution of the El Salvador Bondholders Protective Committee, and to the Legation’s despatch no. 231 of March 27.52
As the Department intimated in its instruction no. 1044 of December 8, 1942,52 it was disturbed at the transaction described in the Legation’s despatch no. 3002 of November 3, 1942,52 by which the Salvadoran Government acquired a considerable block of its defaulted bonds at a heavy discount through a private arrangement with a Salvadoran bank. Since then the Salvadoran Government has rejected the protests of the British Chargé d’Affaires and the Protective Committee regarding this transaction. The Committee, which had been legally empowered by a great majority of the bondholders to represent their interests, has decided to dissolve. These events have accentuated the Department’s misgivings regarding the manner in which the interests of United States holders of Salvadoran bonds are being affected. The Department believes that any funds available for application to Salvadoran foreign indebtedness should first be applied to the resumption of interest payments on this debt, rather than to the repatriation at heavy discounts of bonds which are in complete default and hopes that the Salvadoran Government will follow this course in the future. Moreover, the purchase of a block of bonds from one holder at a price considerably above the then existing market, and the payment of interest on this purchase, would appear to discriminate against the other holders.
The Department has also noted that the foreign exchange position of El Salvador has improved very materially as a result of the increasingly favorable Salvadoran trade balance. This favorable balance has been largely derived from the sale of Salvadoran coffee to the United States at the profitable prices brought about by the Inter-American Coffee Agreement.53 Although the budgetary position of the Salvadoran Government (as shown by the Legation’s reports) is not strong, the general economic situation of the country appears to be sufficiently sound to warrant consideration being given to the resumption of service, at least in part, on its outstanding foreign obligations. It should not be impossible, under the existing economic conditions in El Salvador, for the Government to raise the necessary funds for this [Page 333] purpose. Should a satisfactory arrangement be reached for the resumption of service on this debt, there would then of course be no objection to further non-discriminatory repatriation of the bonds.
The Legation is of course aware of the provisions affecting the Secretary of State in the loan contract of June 24, 1922, to which the Department consented. These provisions not only provided for the nomination by the Fiscal Agent, with the concurrence of the Secretary of State, of two individuals, one of whom should be appointed by El Salvador as Collector General of Customs in the event of a default, but also for reference to the Chief Justice of the United States, through the Secretary, of any disagreement regarding the contract. Many United States investors doubtless purchased Salvadoran bonds on the strength of these provisions, as inquiries from such investors have indicated. The Department is concerned at the possibility that a further effort may now be made by bondholders or the Fiscal Agent to invoke these provisions, and desires to forestall any such contingency.
In view of the facts set forth above, the Department has considered it appropriate to re-examine its position with respect to the existing default on El Salvador bonds held by United States citizens. Unless you perceive objection thereto, you are requested to bring the considerations set forth above discreetly and informally to the attention of the appropriate Salvadoran officials. You are authorized in this connection to consult with Mr. Renwick.54 You may stress the fact that in spite of the change in this Government’s policy which has occurred since 1922, it would be embarrassing both to the United States and to El Salvador if the bondholders should now invoke the provisions of the 1922 loan contract, especially if this should come to be a matter of public discussion in the United States and elsewhere. You may point out that your Government wishes to prevent a situation arising which might be prejudicial to the credit of El Salvador. You should then urge that the Salvadoran Government seek an early opportunity to make an arrangement with the bondholders or their representatives for the resumption of service on its debt, or propose a plan of equitable readjustment. You should not make any communication in writing to any Salvadoran official in connection with this matter.
The Department appreciates that conversations may now be in progress either between Salvadoran officials and Mr. Renwick or between the Salvadoran and the British Governments, and you will of course carry out the Department’s instructions in the light of the progress [Page 334] which these conversations may have made. The Department requests that you report to it the result of any discussions which you may have.
Very truly yours,
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- For text of this agreement, see Department of State Treaty Series No. 979, or 56 Stat. (pt. 2) 1345.↩
- William W. Renwick, President of El Salvador’s Committee of Economic Coordination and representative of the Fiscal Agent under the foreign loan of 1922.↩