Italy's Debt

In Washington opened the first stage of negotiations for funding the Italian war debt to the U. S.

The Negotiators. To the Treasury Department came the Italian Ambassador Giacomo de Martino, Mario Alberti, director of a large Italian bank, the Credito Italiano, and attaches at the Embassy. They were received by the U. S. World War Debt Commission-- Andrew W. Mellon, Chairman; Secretary of State Kellogg, Senator Reed Smoot, and Under Secretary of the Treasury Garrard B. Winston, Secretary of the Commission.

The Expressions. Secretary Mellon began with a brief address:

"We do not minimize the difficulty of payment of your external debt, but we know that the only way to settle the question, which unsettled might be a continual disturbance of your financial structure and a source of friction in our cordial relations with you, is to fund the debt now, taking into consideration Italy's capacity to pay."

To this Ambassador de Martino, peering through his great glasses, modestly replied:

"Premier Mussolini has directed me to begin without delay the negotiations for the settlement of our war debt to the United States. . . .

"We have, therefore, carefully estimated the limits of our capacity to pay. It is obvious that a settlement practically impossible to fulfill or one which might cause disaster to the debtor is not desirable for either of us.

"The basic principle of the capacity to pay is admitted--I am sure--by the practical mentality of the American people and is also accepted, as I have been given to understand, by the American Government.

"We recognize, I repeat it, our debt toward the United States, but we ask that due account be taken of the real conditions, economical and financial, in which Italy finds itself, as well as of our demographic and fiscal pressure, of our national wealth, of the balance of payments and of the commercial balance, and we have to adjust to those conditions the amount, form and the time of payments."

The Action. Strict secrecy prevailed as to what if any agreement was come to. It was presumed that agreement was reached as to Italy's present indebtedness. Then the conference adjourned until Mr. Mussolini could be consulted by cable, and his emissaries receive new instructions.

The Expectation. The frequent emphasis on the phrase "capacity to pay" led to the general belief that a moratorium of five to ten years would be proposed with interest thereafter at 2% to 3% or thereabouts. The intention of both parties, however, seems to be to provide that Italy must pay "every cent of the principal" over a period of 60 or 70 years. This emphasis on the payment of principal is, of course, merely so much pious twaddle. Assuming that a ten-year moratorium is granted and that during that time the U. S. has to pay an average of 4% interest on its own indebtedness, the U. S. could afford to abate one quarter of the principal if instead Italy would or could pay at once three quarters of the principal of her debt of more than $2,000,000,000. And by accepting three quarters of the debt at once, the U. S. would show a handsome profit, for the interest that the U. S. would pay during the moratorium would amount to more than $800,000,000 (not compounded) and the loss by accepting a present payment of 75c on the dollar would be only a little more than $500,000,000. Similarly if Italy pays a rate of interest lower than that which the U. S. pays on its own indebtedness, the difference is a loss, which in effect is subtracted from the amount of the principal paid. But the ways of finance are not the ways of politics. If part of the Italian debt must be canceled, it is in the interest of political peace that this partial cancellation be disguised as a moratorium, a lower interest rate, or both.

The Yugo-Slav Ambassador at Washington made advances to Secretary Kellogg looking forward to the funding of the Yugo-Slavian debt. But that is a minor matter--only about $65,000,000, as compared to the billions owed by France and Italy.