825.51/8–2547
Memorandum by the Assistant Chief of the Division of River Plate Affairs (Lyon)
Summary of Mr. McCloy’s Memorandum Regarding “The Application of Chile for a Loan”72
Ambassador Bowers’ letter of July 21 to the President73 is full of misconceptions. The Bank is far from unsympathetic to Chile and has given more time and thought to Chile’s application than to any other one in the Bank. It is true that a loan has not yet resulted but for good reasons. The Bank insists upon receiving satisfactory assurances that a country to which it makes a loan is actually taking steps to remedy unsound budgetary practices which in most cases have necessitated the country’s applying for a loan.
It is felt that Chile should take the following steps before a loan would be justified:
- (1)
- Reduce non-essential imports. Build up foreign exchange and gold reserves. Chile receives large dollar returns from copper and nitrate exports but is dissipating these.
- (2)
- Attempt to check inflation. There has been much talk but no action in this line. Chile proposes a large scale plan of development, the economic soundness of some of which is doubtful.
- (3)
- Balance the budget.
- (4)
- Revise the tax system.
- (5)
- Make reasonable efforts to come to an agreement with foreign bondholders.
Prior to 1931, Chile never failed to meet its obligations. However, service on its foreign debt was suspended that year. The serious earthquake in 1939 necessitated diverting debt service funds to relief. This continued until 1945 and amounted to $23,000,000.
The Bank has never insisted that Chile reach an agreement with its bondholders. Its position has been that it must consider, before granting the loan, the reason for default on previous loans. The Bank has offered to send representatives to Chile to be employed as consultants. [Page 544] The Bank desires to assist Chile and other countries similarly situated to restore their credit positions.
No Latin American country has yet received any loan from the Bank. The same test will be made for all Latin American countries applying for loans, as well as all European countries.