Dollar Bonds

Experience long ago taught Britain the necessity of presenting a united front to recalcitrant foreign debtors. The instrument shaped for this purpose was the Corporation of Foreign Bondholders, a tough-minded agency which has the active support of the British Government. In the U. S., Congress provided for an analogous agency in a rider to the Securities Act of 1933, but because this smacked of dollar diplomacy President Roosevelt instigated a private agency called the Foreign Bondholders Protective Council now headed by Joshua Reuben Clark Jr., onetime Ambassador to Mexico. Last week the Council published its annual report for 1936. An 866-page study in U. S. gullibility, it was the most complete record of the country's investment abroad ever compiled.

At the end of last year there were $5,374,000,000 in foreign dollar bonds outstanding. Of this grand total no less than $2,000,000,000--38%--were in complete or partial default. Many an issue is so hopeless that market quotations are no longer available. In listing a 6% issue of the State of Coahuila (Mexico) the council was unable to learn the original offering price or the purpose for which it was sold. Yet Russian Imperial bonds repudiated by the Soviet 20 years ago, are still active on the New York Curb Exchange. Last week's price: 1 1/8.

By far the worst default area is Latin America, which accounts for more than one-half of all dollar bonds in default. Approximately 75% of the $1,500,000,000 worth of Latin American dollar bonds outstanding have gone sour in some degree. Only country with unblemished standing in this area of blighted credit is Haiti, which was, in effect, thrown into receivership by the U. S. Marines in the days of Woodrow Wilson. The neighboring Dominican Republic which also received ministrations from the U. S. Marines, has kept up on interests but is behind on sinking fund payments. In national credit standing Argentina outranks all Latin America but several Argentine city and provincial issues have defaulted. Like Canada, where the sins of Alberta are not visited on the federal credit, Argentina can now afford to draw the line between local and national credit. The Argentine Republic has been able to launch a refunding program for its dollar bonds, selling 4% issues in the U. S. to pay off the old 6% series. All the rest of Latin America with dollar bonds outstanding is in default to some degree, ranging from partial payments in Brazil to complete default in countries like Bolivia, Costa Rica, Peru.

Though Europe has a considerably better record on dollar bonds than Latin America (only 50% of them are in default), the grand total of trouble is almost as impressive--$825,000,000. Nearly on half of this figure is made up of German issues. As a group the European democracies have done better than the European dictatorships. France, Britain, Belgium, The Netherlands and the Scandinavian countries have honored their private debts in full. Finland, as everyone knows, even honored its War debt. Czechoslovakia is up to the minute, though the city of Carlsbad is in default. Yet Italy, Austria, Estonia and the Free City of Danzig met every payment on the dot. Latvia has met interest requirements though it is behind on sinking fund payments. But in general the European default area stretches from the Rhine to the Bosporus, including Germany, Poland. Hungary, Yugoslavia, Rumania, Bulgaria and Greece.

Lately the defaulters have indicated a renewed interest in settling their debts, presumably looking to the day when they will want to tap the U. S. capital market once again. A Brazilian mission, headed by Finance Minister Arthur de Souza Costa is now shuttling between Manhattan and Washington, discussing a revision of the 1934 bondholders' settlement with the council and a revision of the Brazilian trade pact with the State Department. Reports of a forthcoming offer from Peru are current. Even China has resumed partial payments on some of its U. S. issues.

Every country has its own excuses for default, the problem of foreign exchange being the most popular. Two other favorites: that funds are needed at home to provide employment in public works programs and that the interest should be scaled down in line with current rates. Most unethical practice encountered by the council is repatriation of defaulted dollar bonds at bargain levels. Though the country stoutly maintains that it either has no funds or is unable to obtain exchange, it nevertheless continues to pay off its debt at a few cents on the dollar. But the most pernicious influence discovered by the council was the theory of "capacity to pay." Said the report:

"A sovereign must be assumed to know when he borrows from private parties whether or not he will be able to pay. . . . Furthermore, whether a sovereign pays or does not pay, depends in greatest part upon his will to pay. For few, if any, governments have borrowed beyond their capacity to pay if they really had a will to make the necessary levy upon the property of their nationals. . . . Under the theory of international law, expressed by early writers (and not really doubted until, since the World War, it came to be to the interests of the writers of certain nationalities to cast doubt upon the theory), the whole wealth of the nation, including the private wealth of all the nationals of that nation, is subject to tax up to extinction for the debts of the sovereign. No nation has any right to invoke its lack of 'capacity to pay' . . . until it has fully exhausted its taxing power and no debtor sovereign now in default, insofar as the council is advised, has even approached a condition of exhaustion of its taxing powers."

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