WHEN THE DEBTORS SAID NO

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87-00462R000100140024-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 3
• Document Creation Date: December 22, 2016
• Document Release Date: February 22, 2010
• Sequence Number: 24
• Publication Date: December 28, 1983
• Content Type: OPEN SOURCE

Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5
THE DIRECTOR OF
CENTRAL INTELLIGENCE
22 July 198b
NOTE FOR: See Distribution
FROM: VC/NIC
Let me know what you think of this, which
originally was distributed by Maurice when the
article first appeared.
Herbert E. eyer
Attachment:
"When the debtors said no"
by Anatole Kaletsky
Financial Times, 28 Dec 83
Dist: NIO/Econ
A/NI0/Econ
NIO/LA
NIO/AF
NIO/EUR
NIO/NESA
NIO/USSR'
SRP (5)
Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5
 Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5
LESSONS OF THE 1930s Financia, fimes Wednesday December 28 1983
When the debtors sal
no
RIO DE JANEIRO, August 30
(UP) - Official announcement
that a partial moratorium had
been obtained on foreign debt
payments was made today by
the Brazilian Government pub-
Ucity bureau. The Government,
it was stated, has decided to
snspe+hd temporarily foreign
debt payments with the excep?
tins of two funding loans and
the Coffee Loan.
THESE two sentences,
which hit the world's
financial markets like "a
bolt from the blue," in the
words of the following day's
Financial Times, had certainly
not occurred to Mr Thomas W,
Lamont, senior director of J. P.
Morgan and Co. on Friday.
July 23 the year before Brazil
went bust.
At 3 m that Friday after
noon Mr Lamont. In his capacity
as chairman of the Internattond
Committee of Bankers on
Mexico, felt nothing but pride
and Satisfaction as be ushered
Sr Luis Montes de Oa, the
Mexican Finance Minister, into
the Morgan Bank's
boardroom in Wall Streee~
over his Shseemed as hep added
his signature to that of the
F+.nance Minister on the agree.
ment which brought to a
Successful Conclusion the
biggest-ever renegotiation and
settlement of a defaulting
Cou?7's foreign debts. Here
at last was a piece of good
now which could provide a ray
after to the financial world ear disasters. tyhe likes of which the
world had never seen.
This Dot Yet exCL+ag~ulzhedi , on Net
Year's Day live months later
when the lsomrtan Legation in
New York issued the following
Statement:
By Anatole Kaletsky
in a position at th.s time to t : =Ustfltiat lash aeDiteaee; swa The superficial features of
meet the interest obligations ' the reader with a moderate the 1930's debt crisis should be
which became due on its exter. I interest is international finance teal debts on January 1.0 might have wondered whether familiar to anybody who has
Bolivia intended " to fulfil its all these references to govern- been following the events of
obligations fully and abso? meats "defaulting" and oing the 1910s.
111201f," the statement added. bust" were supposed to be fact. There was, of course. the
But It would need the. landing- forecast or just plain fantasy. geograpNcd distribution of the
eni# of Its cseditaft for S ?tbm. After all, it is common know. defaulting nations.
Von" country's period because of the ledge today that countries Fsas ifi31 onwards the U.S. once on exceptional depend. cannot just go bust." A govern- Congress (with Mr Lamont of
exports Of tin. meat,?.an always pay its debts if Morgan and Mr Mitchell of
It seemed to be another the ration is willing to accept National City as the first two
"special case" that landed three temporary sacrifices. Even the witnesses) held indignant bear
months later on the desk of Mr most impetuous politicians lop on the bankers' "acanda-
Charles Mitchell, chairman of realise that deliberate default lous practices and abuses " in
the National City Bank of New can be t %ntamount to national pushing loans during the 1120s
York. The plaintive letter on economic Suicide. on unsuspecting foreign dicta.
his desk from Peru's new tors.
F
inance Minister. read (in These fundamental truths Commissions of International
Part
I:am crania hOuslY ave in been recent proclaimed so vigor, financial experts-sucb as Sir
g you with America and Eastern as
Europe Otte rid
England and of the Bank of
respect the Interest due have appeared sad Professor Edwin
April 1 next on the e Peruvian to approach the Kemmerer
National Loan. This Government brink of bankruptcy, that
National 3dill%Ar
common slty-weapt LW-
took oillce on March 11 last, knowledge" has porn to Poland by cofrom
mmittees
after a period of political dis? en rely history-about wave Of baake:, or by the Leaague or
turbances extending over six national defaults which swept But Nations even esmor confidence.
ting
months. It Ands the Treasury throughi precisely these same more the p
bare of funds. both as a resultons in the 19304. lsadbw for are the possible
This collective amnesia about or the future,
of these political disturbances the International *lendin dl.. Defaults in the
110011 is.
and of the economic depression esters of the 1s two variably proved much deeper,
which has obtained for more possible explanatlo3011 uL ba longer and more subtle than
than a year. As a result of these anybody The avers imdy had a:yeefed Just one
conditions, for which the pro la defaults in month before Brasil M
sent Govet~hment is not respon- Germany. Austria and other default on August 30, 1931,, for
sible, it has not the capacity at central European countries were example, Sir Otto found "that
this time to pay In full the due not to excessive commer? Brazil had all but turned the
service charges on the Repub? cial borrowing, but to the us corner on her dimculties."
lies entire debt" supportable burden of re par* On December 18, a
By the end of that summer, time from the First World War. bankers told the group w York
it war aer ,tn:ger poessU t m tan[ The vast sums Involved in thew T New of "special saws." national defaults on eswntlally Times that Mexico had "reached
In July. two months after Political obligations have a stage rK economic con tat?ea
Peru's letter. Mr Mitchell tended to divert attention from period, of reh btiliitation which
received a cable in almost the sovereign -defaults on purely will compare favourably- with
identical terms from the commercial debts. Yet the com. other major countries. On
Government of Chile. Then, a Inertial defaults had mounted January 22, 1934. a special
month later on August 30, to roughly $3bn by 1933-a session of the Mexicap Congress
came Brazil's "bolt from the hug sum Only the context of a declared tea cptuttr:9' agree -.
blue." y $24bn for the meat wits the Lamont cow
With Brazils "temporary" whole of the world's trade. mittee "a nullity " and
moratorium, the floodgates were Secondly. the ~ ? International suspended all loan a
p lmaats for
opened. Cables poured in from
borrowing of the 1930s coins three years
.
,Common s Ecuador. Colombia and Central mainly from investors in the Misapprenhensions like thew
knowledge America. Within a year only bond markets, rather than from stemmed partly from a curious
three major Latin American t banks. This left the banking paradox, which may also prove
has forgotten
countries-Argentina, Venezuela ayetem leas exposed to instructive in the 19f10's debt
and the Dominican Republic . 'sovereign defaults and banker; crisis. 4tvernme114"111 ,me
waro about history wen meeting their obligations themselves lea preoccupied by atu ern f consequena& is full. Soon Hungary. Yoga their sec e y w n t e r n ftuu
is
04
"Owing to the current world. slavia, Romania, Poland and But, despite this important stn
wide business depression, the Bulgaria were also in default technical difference, the parcel. r a aD
general revenues of the Repub- Finally, even Germany blocked lob between the debt crises of the bankers
were partly right In their
He of Bolivia hikve been tem, its foreign Payments as Its tough the 19305 and the 1980s are economic
new leader-Adolf Hitler- more than just an historical predictions about
porarily reduced to such an consolidated de power, curiosity Brazil and Mexico. They were
extent that the Republic Is not recovering by 1934 --ice fact
Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5 0 1 op 2
 Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5
?m ,GOVf11N11LNT AND
. URDtM-TION.
rA RrlA l..1t; larl:x%HtV
uu'luttu urux.
M .1...-
uM. I.t 12-4
- .nrw w S .w.a?.I aw w
Sir Otto Nieoaeyer..f tic. Bank at sastamd (left) and 1[r 710man W. Lament of S. P. Morgan
Brazil's industrial productio
crew by 11.9 per
a el
from 132 to 1939. Putras the.,
countries consolidated the:
ravaged economies and return.
to political stability, their dete:
urination and ability to wit)
stand pressure from foreig
creditors grew as well. This i
exactly what many Braziliar
and Mexicans today expect thel
governments to start doing 1
the next year or two.
e>aUeltl A ' iw w'iSldl .ilKL
repudiated its debts,
beat by 19,}9 there was no longer
an thong t of " loyally com?
plying " with external obltp.
lions, 4 promised in the
Peruvian letter to the National
City Bank In 1931. Indeed, when
the Mexican President asserted
publicly Is September 1933,
that "the Present and future
Amandal ; oUcy of the Govern.
went does not permit of any
idea of renewing service en the
foreign debt, bls statement did
aot even rate a report in the
SnancLl press.
The bond market am Picked
Up slightly ~ht y temporary Brad con-
verted mora-
torium into Q .r
'
default by s-tB31 mot It Would
issue ne?..ly-printed bobs for
20 and 40 years in lieu of ash
Interest payments.
Of course, the major debtors
took liberties with their
a the U.S. ~Nd British s Govern.
ments let them get away with it.
But here is another lesson from
the 1930s. The creditor govern.
ments did not unleash retalis.
tory trade meaou 'es against the
defaulters or ostracise than
from " the community of
nations," On the whole, they
blamed bankers for " overlend-
ins." more than me Minn for
tailing to pay.
The U.S. and British Govern-
ments' insouciance steamed not
just from cooscismoe, or even
political expediency, a World
War Two made the pnservotion
alliances
paramount.
o Latin vests
A well-established
also
lemo seater to remember the
better than their bankers. 'year cycle
Since the 2820s, Ltia- of default
Ameri ca had d
f
l
e
au
ted en
manse repeatedly. The losses
of the 1930, were accepted as
Just the latest turn of a well.
established 50?year cycle of des
fault, followed by further mas.
sive ertetsadons of credit. Exper i-
a hail shown that lenders
against wvOut d teal sanction
gn defaulters...
cutting off new credit.
Normailly, after a kftthy
Period of default a country
would seek so reestablish its
credit by offering its bond.
holders a " r.adjustmeat "
M"ftg
claie ,x their eir outstanding
face val se. Most of the Latin
Americans and Eastern darn.
Dean countries lifted their de.
faults like this in the 194k
and 195Gs. Mexico was one of
the first in 1941, when it Psi. The Lemont committee
to r co#nmend acceptance of
less than ISOm in settlement of
more tlwn $500m of outsgnd.
ins debts.
The bondholders reluctantly
agrood. on
some payment w abetter than
had bought the also because Mexican bands
as Pure speculations at knock-
down Prices during the cans.
Wrs Protrwted porlods
of total default bet en
and 1943.
Once an adjustment was'
agreed by bondholders. the
stigma of default was offlci.lly
expunged and the country
could again start 'seeking
credit. Mexico was allowed to
,--r 1im t' us. JFtii6
Bank as early as 1942, while
ft was still negotiating with the
bondholders, but attar it had
settled other outstanding claims
against It, following the exr
Pr'opttaGbn of U.S. oil con.
Denies. Slowly but steadily, it
returned to its pM..mlowt
Poe tioo as one of the woeld's
greatest debtors.
Nearly four decades later. in
April 4361, the al.:iwn Govern.
toent approached the sterling
bond market for a loan of $50m
on behalf of Pemex, the state
soil c ompaay. The following
appeared in the
Prospectus:
"Full debt service has been
paid when due upon all the
external debt Issued by the
Federal Government of Mexico
since the adoption of the con.
sttution of 1917 ..
The prospectus did not bother
to explain this enviable record.
For nearly 30 years, from 1914
to 1943, Mexico had defaulted
on most of its pre-1914 oblige.
Cons and was therefore pre-
vented from raising new loans
on which it could commit any
" fresh " defaults.
That is the sort If tine point
that bankers see:.. willing to
leave to the history books.
Approved For Release 2010/02/22 : CIA-RDP87-00462R000100140024-5