Foreign Relations of the United States, 1958–1960, American Republics, Volume V

290. Memorandum From the Assistant Secretary of State for Inter-American Affairs (Rubottom) to the Under Secretary of State (Dillon)¹

Washington, June 13, 1960.

SUBJECT

• Financial Policy Toward Brazil

Problem

In March, Ambassador Moreira Salles informally sounded out Assistant Secretary of the Treasury Upton on whether the U.S. would be favorably disposed to a balance-of-payments loan to Brazil of about $50 million should the need arise this year.² The Ambassador stated that it was touch and go as to whether Brazil would find itself in a serious exchange crisis this year and that he would like some indication of the U.S. position before making any further approach. He indicated that if a formal request were made, U.S. insistence that Brazil first work out a satisfactory stabilization program with the IMF would cause his government serious political problems, in view of the current Brazilian presidential election campaign. On May 4 he told Mr. Waugh that Brazil might need exchange assistance later on this year, mentioning at the same time the need for the U.S. to give serious consideration to the “political implications” of the Brazilian scene and not impose “unpalatable conditions” for assistance.³ The Brazilian Minister of Finance, Sebastiao Paes de Almeida, is now in Washington because of the meetings of the Board of Directors of the International Coffee Agreement. While here he may desire to exchange views on Brazil’s financial situation.

In view of the foregoing, it is timely that we review again the financial situation in Brazil and summarize the position which we should take in the months ahead.

Discussion

The policy adopted and expressed to Brazil in 1959 to the effect that the adoption and implementation of a satisfactory stabilization program in conjunction with the IMF would be necessary if U.S. financial assistance to Brazil were to be effective, and that therefore under present circumstances such assistance could not be considered, continues sound and should be maintained. The recent drawing of $47.7 million granted by the IMF for a period of six months, to complete the first credit tranche, is not an exception to this policy, and this was stressed by U.S. officials while the drawing was under consideration. Moreover, the Fund’s press release states “the present transaction, which is thus of a short-term character and not part of a general stabilization program, is for the purpose of mitigating current difficulties in Brazil’s situation[”]⁴

While continuing to refuse balance of payments loans in the circumstances, we should maintain a sympathetic and helpful posture by offering to assist Brazil by means other than balance of payments loans.

In this connection, in the letter of understanding which the Export-Import Bank has with the GOS covering repayment of the $300 million loan of 1954 [1953],⁵ there is a provision that Brazil may automatically suspend its monthly repayment in any month during which dollar purchases by the Bank of Brazil from exports fall below $50 million. A recent change in Brazilian exchange regulations has the effect of reducing substantially the scope of Bank of Brazil dollar purchases. This is a technicality and in effect alters the basis of the original understanding with the Export-Import Bank and, if unchallenged by that Bank, would permit the Bank of Brazil to suspend monthly repayments on the basis of the new purchasing criteria. As these repayments are in the amount of $4 million monthly, the present situation provides a virtually automatic rescheduling of Brazil’s debt to the Export-Import Bank which would amount to some $24–28 million during the remainder of this calendar year. In the face of Brazil’s prospective 1960 balance of payments crisis, the Bank has brought this to the attention of the Brazilian Ambassador and might be disposed to refrain from questioning the Brazilians on this point and thus to permit this automatic rescheduling for the balance of 1960. However, it would not be willing to amend the original letter of understanding to this effect.

Should the recent drawing granted by the DS, plus the above-mentioned easement on repayments to the Export-Import Bank, prove insufficient to stave off a major crisis in Brazil, we might at that time be prepared to repeat to the Brazilians our offer of 1959 to discuss proposals they might advance concerning a rescheduling of Brazil’s current payments on its debt to the Export-Import Bank. However, should such rescheduling become necessary, and should it have to be undertaken by the U.S. alone, it should result only in a short-term postponement of debt payments due to the Export-Import Bank this year. This would preserve for the Export-Import Bank a proper negotiating position vis-à-vis European and other creditors of Brazil, in any debt moratorium or rescheduling, which may have to take place in the early months of the new Brazilian administration. In addition, we should be in a position to suggest that Brazil approach the Federal Reserve Bank of New York to seek again the short-term gold collateral loan which the Federal Reserve Bank approved in 1959 but which Brazil did not use when coffee earnings improved. The amount that Brazil could raise by a gold loan would be only about $14 million (the amount of Brazil’s free gold holdings in New York) and Federal Reserve would not be happy to make a gold collateral loan to Brazil at the present time. These two points, however, should be held in reserve for as long as possible, in view of the temporary relief which Brazil has obtained from the IMF and seems likely to obtain from the Export-Import Bank.

To emphasize our desire to be helpful and cooperative we should also reassure Brazil that Export-Import Bank financing is still available to assist in the financing of sound development projects on a selective basis. The recent Varig loan and other loans now under consideration by the Bank can be cited in this regard. The Export-Import Bank considers that in general such projects, in order to qualify for financing, should make a direct contribution to a solution of the balance of payments problem. The Bank, although it feels strongly that this general criterion is needed, would have to judge each case on its merits.

On June 10 the Brazilian Ambassador requested the initiation of negotiations leading to a new PL–480 Agreement to replace the present one which expires June 30, 1960.⁶ In line with our agreed position, we replied that exploratory discussions should be held initially in view of the probability that Brazil may object to certain features which the U.S. will require in any new PL–480 Agreement. Informal discussions will begin in the Department on June 14.

Recommendation

That you authorize U.S. officials at Washington and at Rio de Janeiro to respond along the following lines, as appropriate, to further Brazilian initiatives for U.S. financial assistance:

1. The U.S. continues to be sympathetic toward the financial and development needs of Brazil, as witnessed by our substantial assistance over the years;

2. Brazil has already, through its letter of understanding with the Export-Import Bank, a conditional means of easement of its repayments schedule whenever dollar purchases by the Bank of Brazil fall below $50 million monthly;

3. The Export-Import Bank continues willing to assist in the financing of sound Brazilian development projects, on a selective basis, the general criterion for such projects being that they make a contribution to the foreign exchange problem;

4. Informal discussions are beginning with the Brazilian Embassy toward the negotiation of a new PL–480 Agreement to replace the one which expires June 30;

5. If financial assistance beyond that available under the preceding numbered paragraphs is to be considered, it is our view that an effective stabilization program should first be established so that such assistance could fulfill its purpose. Should the Brazilians raise the question, we should take the position that it is quite clear that IMF agreement to the proposed drawing of $47.7 million (since it represents only availabilities under the first credit tranche of Brazil’s quota) in no way implies such a stabilization program on Brazil’s part.⁷

1. Source: Department of State, ARA/REA Files: Lot 62 D 302, Brazil 1960. Confidential. Drafted by Hemba, William T. Briggs, and Post on June 9. A footnote to the concurrence by Export-Import Bank President Waugh in the source text reads as follows: “The Export-Import Bank desires to reaffirm that it has believed that assistance to Brazil should be in the form of deferral of payments on existing obligations rather than new balance of payments credits.” A background paper attached to the source text is not printed.
2. No record of this conversation between Moreira Salles and Upton in March has been found in Department of State files.
3. A copy of the memorandum of conversation between Waugh and Moreira Salles is in Department of State, ARA/EST Files: Lot 62 D 308, ARA:EST/B 1960 Files.
4. Documentation regarding the Brazilian 6-month drawing of $47.7 million from the Fund is ibid., Central File 398.13. See also International Monetary Fund, Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1961 (Washington, 1961), p. 25.
5. For documentation on this loan, see Foreign Relations, 1952–1954, vol. IV, pp. 607 ff.
6. A memorandum of conversation, June 10, between Brazilian Ambassador Moreira Salles and Assistant Secretary Rubottom on the Brazilian request is in Department of State, Central Files, 611.3241/6–1060. For text of the Surplus Agricultural Commodities Agreement of September 2, 1959, see 10 UST (pt. 2) 1638.
7. Dillon’s stamped approval, June 14, appears on the source text.