Evening star., 1939-04-02
i. S. Brazil Accord Stirs HOPES
For South American Bonds
Precedent Set When State Department Stepped Into
Picture to Break Logjam in Repayment
to Private Investors
Bv Blair BoHes.

vestment bankers in the flotation of
foreign securities is one of the most
scandalous chapters in the history OF
American investment banking, The sale
of these foreign issues was character
lied by practices and abuses which were
violative of the most elementary prin-
ciples of business ethics.
ignored" Basic Facts.
| Far from exercising discrimination
| in relation to these issues, the bankers
failed to check adequately the informa-
ton furnished by foreign officials; ig-
nored bad debt record and bad moral
risks; disregarded political disturbances
and upheavals; failed to examine, or ex-
amined only perfunctorily, economic
| conditions in foreign countries; failed
to determine whether the proposed uses
| of the proceeds of loan issues were
| genuinely constructive; failed to ascer-
! tain whether the proceeds of loan issues
were applied toward the purposes spe-
| CITED in the loan contracts; failed to
ascertain whether revenues pledged for
the service of loans were collected and
properly deposited in accordance with
| the agreements, and generally INDUCED
in practices of doubtful propriety in the
promotion of foreign loans and in the
sale of foreign securities to the Amer
ican public"
| Brazil contracted its first foreign loan
in 1924, and took care of all its obliga-
tions on the bonds without hitch for rs
years. The history of the bonds involved
in the present default 60 back only to
1919, however, when the City of Sac
Paulo put on sale in America an issue of
| s8,500,000 at 6 per cent for refunding the
| external 6 per cent loan of 1916. The
! last interest paid on this loan was jan
, uary l, 1881. The amount outstanding
| is IS 409, 900.
| Involved in the defaults are five issues
| of the Brazilian national government
per cent bonds of 1921. s3l $4,000 out
standing on a 5o,0Oo,OoO loan, with the
last service dated June l. 1884; 7 per
cent bonds of 1922, s175O3,0 900 outstand-
ing on s25, 900 900 loan, last service June
l. 1884: 6lA per cent bonds of 1926, $685.
| 100000 outstanding on $60000,000 loan,
last service October /. 1884; 5 per cent
loan of 1881, s24 433 PAS outstanding, last
service October l, 1887. There was
another national loan of 6lz per cent
| bonds issued in 1927, Sal, 5000 for the
United States and 8,75OOOO pounds for
Great Britain; s39 100000 and 1872 300
pounds remaining outstanding, with last
service on october IS, 1884.
Most Issues for Refunding.
| Most of these national bond issues
were sold for refunding purposes. The
1922 ISSUE however, was for the electri-
tication of the Central Railway Of Brazil.
Thirteen years later, on March is, 1885,
Brazil and the Metropolitan Vickers Co.
of Great Britain came to $4,000 900
agreement for electrifying this railroad,
! and in 1897 President Vargas of Brazil
arranged for a S0-year program for the
construction of an overhead electric line
for this same road.
The Brazilian states whose bonds are
in default are Ceara, Maranhao, Minas
Gereas, Parana, Pernambuco Rio Grande
do Sui, Rio de Janeiro, Santa Catharine
and Sac Paulo. The municipalities
whose bonds figure in the Brazilian
agreements are Porto Allegro, Rio de
Janeiro and Sac Paulo.
The Ceara issue precipitated a row
between the Brazilian state and New
Orleans group of bankers, with the Cea-
rams claiming that faulty handling of
the issue by the bankers jeopardized the
issues success. The bonds were issued
in 1922 and no payment has been made
since July, 1880. The outstanding amount
is 81 $780,
Most of these state and municipal
bonds represent refunding operations.
But some of them have other purposes.
Minas Gereas, for instance, put out
bond issue in 1929 to raise almost $685.
OOO,O 900 to buy additional equipment for
the South Minas Railway and the Para
catu Railway, for developing the electric
light and power system of Bello Hori-
zonte and for advancing funds to the
Banco de Credito Real of Minas Gereas
for incr >asing its facilities for making
agricul E and mortgage loans There
= s75 1000 outstanding on this, with
the LAST service recorded September /,
\ 1881.
For Railroads ana sewers.
| 'Ahe state of Sac Paulo took $15-
OO0, 900 loan in 1925 for additions bet
terments and extensions to the state
owned Sorocabana Railway which
traverses Sac Paulo's coffee and sugar
country A year later Sac Paulo bor-
rowed $500, 900 from American investors
for improving the sewers in Sac Paulo
City. On the first loan, $14 900 is
outstanding, and on the second $6,9l4 900.
>Another Sac Paulo sewer loan of $l5,-
100000 was let. for the benefit Of the
American investor again, at per cent,
in 1929 Outstanding on this defaulting
issue is $14,698 900.
The governmental agreements con-
cluded between our State Department
and DR.. Aranha open new phase OF debt
negotiation. This country takes over the
job OF enriching the foreign countrys
economy to facilitate its ability to pay.