Tit for Tat?

The usually mellow London Economist was hopping mad. What had excited it, and other Britons, were the terms of the new settlement of Brazil's external debt, as they went into effect last week.

Cried The Economist: "It does not need to be proved that the American creditor has received better terms than the British. ... Of the outstanding debt Americans hold 34.2%; but they are to receive between 36.4 and 39.3% of the payments. ... If this is to be the treatment meted out to creditors then any hope of a revival of genuine international lending had better be abandoned. . . . The British authorities were unwilling or unable to put any pressure on the Brazilian Government in favor of a less inequitable settlement. . . . To put the matter quite bluntly, the British holder of Brazilian obligations has been made a sacrifice to Pan-Americanism."

Lesson Taught. The deal that had the British hotted up was put through after negotiations between Brazil and U.S. and British bondholder groups. But the British still thought they had good reason to be suspicious. For U.S. interests were handled by the Foreign Bondholders Protective Council with State Department approval. The F.B.P.C. was born because U.S. bondholders had taken a sound licking on a previous "settlement" of Brazilian bonds in 1934, the "Aranha Settlement."

This hurt U.S. bondholders. Not only was interest drastically reduced, but bonds were split into seven classifications, with the top ones getting the interest preference. And 23% of all U.S. bonds were placed in the next to the last class.

The Aranha plan flopped because even the reduced interest was too high for Brazil's low exchequer. Later, Brazil resumed paying interest. But it was so low the bondholders complained and chivvied Brazil into the new plan, which covers $838,000,000 in dollar and sterling bonds. Under this plan all bondholders have a choice of 1) Option A, under which the face value of the bonds remains the same, but interest is slashed in half or more, 2) Option B, under which the value of the issues is cut from 20% to 50% and interest is reduced. But bondholders get a lump sum up to 17% of the bonds' value.

Lesson Learned. The nub of the British complaint was that the interest on sterling bonds was slashed more than that on dollar bonds; that one class of sterling bonds was wiped out, although Brazil will pay 12% of their face value.

But in laying the blame for this on the Good Neighbor policy, the British overlooked one fact. It is mainly through this same policy that Brazil is able to resume interest payments at all. Because of Lend-Lease, and the resulting purchase by the U.S. of vast stores of raw materials, Brazil's pocketbook is the fattest in years. As many U.S. moneymen pointed out, the plan is better than any which Britain has thus far secured. No matter what its drawbacks, the plan promises to put interest payments to U.S. and British bondholders, even if reduced, on a reasonably permanent basis.

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