Latin American Bonds

Oct. 2, 1889, James G. ("The Man from Maine") Blaine, U. S. Secretary of State, opened the First International Conference of the American States in Washington. One recommendation made by this conference: an Inter-American Bank, to be owned cooperatively by the U. S. and other American Republics, to finance hemisphere trade. Last week, 50 years later, Cordell Hull's State Department had lined up five Latin American Republics (Colombia, Mexico, Nicaragua, Brazil, Bolivia) as its partners in an Inter-American Bank, to be set up as soon as Congress passes the necessary laws.

To contemporaries of Cordell Hull the problem is more urgent than it was to James G. Blaine's. To Latin America, World War II has meant the loss of roughly $17,000,000 a month to Germany alone, has jeopardized another $35,000,000 a month in exports to the Allies, nearly equivalent losses of imports from Europe. To the U. S., Latin America is a great potential market for industrial products, a great potential source of needed raw materials (such as rubber, tin) whose usual sources (British Malaya, Dutch

East Indies) are either war-jammed or war-threatened.

Logical, as well as urgent, is an increase in U. S.-Latin American trade. For to develop her production of what the U. S. needs, Latin America requires millions of dollars worth of mining and farming machinery, railroads, utilities, other capital goods. These, without export markets, she cannot buy. Hence the need of an Inter-American Bank and U. S. credits to Latin America.

The Obstacle. Latin America, in previous U. S. experience, is a bum risk. Haunting the U. S. money markets are 155 defaulted bond issues of (or guaranteed by) 16 Latin American Republics. They represent 77.1% of the $1,600,530,070 (178 issues) floated by Latin America during the heyday of gold-plated foreign bondjobbing. After seven years of Good Neighbor talk, some of these cats & dogs are still selling for one and two cents on the dollar. This debris of the last spree is the first fact to be explained away by all advocates of new credits.

Extremists both North and South make the solution of this problem tougher. In Manhattan sits the unofficial Foreign Bondholders Protective Council, Inc. Taking a they-hired-the-money attitude, it protests partial settlement offers by the debt-laden Republics, thereby revives traditional Latin American resentment against the Shylock of the North. Extremists in the South are hardboiled governments (Mexico's, Bolivia's) which assume that the U. S. has the jitters. Eager to capitalize on Washington's fear that the Fascist axis will undermine the Monroe Doctrine, they would kid the U. S. into canceling the bonds, highjack new credits in the name of hemisphere security.

Between these extremes are friendlier Republics (like Colombia), which recognize the need of settling the bond question in a way that will make new U. S. loans respectable. In the middle too is the State Department, patiently trying to worm token payments out of defaulters to justify new credits and get the trade ball rolling.

Implacable Mexico is the No. 1 object lesson in the perils of Latin American lending. Outstanding Mexican Government debt in default: $273,696,054. Centre of the knot is Mexico's two-year-old oil crisis. Refusing to yield on the right of expropriation (which Good Neighborist Hull conceded in principle early this month), Mexico would like to make a deal whereby Sinclair, Standard (N. J.), other original owners would distribute her oil and quietly reimburse themselves over the years. But with a sharp eye to the world supply, now more than ample, U. S. oilmen* find Mexican political recalcitrance a convenient excuse for keeping it off the market. Last week Mexico brought new pressure on Cordell Hull by making a $3,000,000 oil deal with Japan. But so long as the oil stand-off persists, chances of Mexico's refunding her bonds and getting big U. S. credits are nil.

An object lesson of the opposite sort is Colombia. Of her $146,265,930 debt, interest or sinking fund payments on $143,649,900 are in default. Still primarily a coffee producer, Colombia's economy got a shot in the arm when Texas Corp. and Socony-Vacuum began developing the famed Barco oil concession by an investment of some $40,000,000 (TIME, Oct. 30). The Barco boom caught Colombia without railroads, roads, utilities, even machinery repair facilities. Her President, reason-hearing Dr. Eduardo Santos, had to wait several days after his inauguration before he could get a telephone in his office. Last February pro-Washington Santos offered a one-year plan for paying 3% on Colombia's 6% bonds, a $400,000 fund for repurchasing some of them. Anticipation sent Colombian 6's from 1939's low of 19 3/4-c- on the dollar to a 34 1/4 high this year, indicating the strong leverage exerted by well-intentioned token payments on a poor credit rating.

To one U. S. businessman the Colombian deal was a personal triumph. Chicago Bond Dealer William Wilson Welsh had been commuting between Chicago, Washington and Bogota for months, advising President Santos, selling Colombia's new frontiers to his Chicago clients, selling Administration officials the idea that Colombian 6's would make a good laboratory demonstration. Last week Frontiersman Welsh was tubthumping another solution to the Latin American credit problem: let bondholders trade their dollar bonds for new bonds payable in Latin American currencies--equivalent to equities in (rather than claims on) the future of Latin America.

Panama is more practical than Mexico, a tougher bargainer than Colombia. For having served as a backdrop for the U. S.'s Panama Canal Putsch in 1903-04, Panama today receives some $630,000 yearly as rental for the Canal and from U. S. investments. This sum, plus about $1,000,000 of her internal revenues, was formerly pledged for service on Panama's $17,757,315 of bonds, all in default. In the works now is a deal for refunding this debt, by which the interest rate is to be cut, and for which none of Panama's internal revenues are to be pledged. Not too pleased with this scheme are Panama's U. S. creditors, who have rosier notions of her ability to pay. But tough, Canal-circling Panama knows full well that the State Department will cut her in on all spending programs for hemisphere defense. As a starter she is set for a $5,000,000 Export-Import Bank credit.

Brazil, which cannot bludgeon Washington with a Canal, is just as practical. Her method is to hold periodic flirtations with Germany. Bad debtor Brazil owes the U. S. $356,557,745; all of it until this month was in default as to interest and sinking funds. Her Foreign Minister, dashing Oswaldo Aranha, ever since 1934 has been promising and procrastinating back & forth between Rio and Washington. Upshot: until November 1937, Brazil paid about half of her old interest bill, then defaulted again, has just resumed payments--this time at an average 22% of the old rate. Even this may prove too much for her coffee economy to support. But Brazil badly wants capital goods, is willing to play ball. Fortnight ago she began "thawing" about $20,000,000 of frozen dividends and interest owing foreign investors in Brazil. Back came the ball: a $5,915,000 credit from Cordell Hull's Export-Import Bank. Its purpose: to let Brazil buy equipment for railroad electrification from General Electric and Westinghouse, rails from Inland Steel.

Also remote last week stood the possibility of immediate trade increases between the U. S. and Bolivia, Ecuador, other bad debtors. Slightly less remote was a Peruvian refunding plan. But on all these Cordell Hull continued to level a patient Northern eye, ready to deal with whoever would help him save the Good Neighbor Policy's financial face. One fact has been established by the tentative deals to date. Even a token payment on defaulted bonds raises their value on U. S. money markets, and is likely to be returned to its maker in export credits multiplied many times.

*With the possible exception of Sinclair, for weeks reported to be working on a settlement with Mexico.

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