PORTFOLIO INVESTMENTS BY CLASSES

National government issues comprised slightly less than 45 percent of the foreign dollar securities outstanding on December 31, 1933. Another 22 percent is made up of the issues of foreign state (departmental) and municipal governments. Thus 66 percent of the estimated American share of foreign securities outstanding on December 31, 1933, were direct governmental issues. Of the corporate issues, almost half were guaranteed or controlled by governmental units. It is apparent from these percentages that faith in governments played a large part in American foreign lending.

The estimated American share of foreign securities outstanding on December 31, 1933, is shown by areas and by classes in table 24.

TABLE 24.-AMERICAN INVESTMENTS IN FOREIGN SECURITIES, BY AREAS AND CLASSES, AS OF DEC. 31, 19331

In making these revisions of the estimates of American direct investments in foreign countries, advantage was had of the questionnaire returns which formed the basis of the Department's report to the Senate in response to Senate Resolution 138 (S.Doc. 120, 73d Cong., 2d sess.). That report covered the investments of only those United States producers whose foreign investment amounted to $50,000 or more and was principally concerned with American manufacturing investments abroad, although some data were obtained regarding raw material producing enterprises.

Additional material, which was of considerable assistance in making these revisions, was collected currently during the years from 1929 to the present time. This material consisted of corporation reports, newspaper and magazine clippings, and reports from the foreign offices of the Departments of State and Commerce. The annual reports of American corporations contain an increasing amount of information that is useful in a study of foreign investments. This is a result of the policy followed by many corporations of keeping the stockholders more fully informed regarding important company developments.

Even though a considerable amount of detailed information has been available for this revision, the results must be considered as rough estimates.

No attempt has been made to put these estimates of direct investments on a present-worth or market-value basis, since only book values are readily available. The principal advantage of using book values is that they provide a better basis for estimating the earnings accruing to the United States each year from foreign investments.

Portfolio investments, largely holdings of bonds, have been estimated on a par value basis for more or less the same reason—that is, interest is calculated on the basis of par values, and the records of the bonds of each issue outstanding are also kept on that basis. It might be interesting to know the liquidating value of our foreign security holdings as of a given date but this could not safely be based on market quotations, since any wholesale attempt to liquidate our security holdings would alter market values greatly. For most purposes the market values of our investments in foreign securities can be approximated closely enough by using the (weighted) average prices of foreign bonds listed on the New York Stock Exchange as published in its Monthly Bulletin.27

II.-DEFAULTS ON FOREIGN DOLLAR BONDS

On January 1, 1931, the Republic of Bolivia defaulted on its 7 percent issue of 1927-57. That was the first of a long series of Latin American and European defaults. Chile and Brazil, in that order, all defaulted before the end of 1931. The following year again witnessed a large number of defaults; namely, the States, Departments, and municipalities of Brazil and Colombia, and some of those of Argentina; the Republics of Costa Rica, Ecuador, and El Salvador; and, in Europe, the provincial, municipal, and corporate issues of Austria and Hungary, the Republic of Greece, and the Kingdoms of Bulgaria and Yugoslavia. In 1933 defaults occurred in Panama, Uruguay, and Colombia. During the year, Germany and Rumania were also added to the list of defaulting European nations, the former involving all of the Germany issues, except the Dawes and Young Plan loans.

Defaults are of various kinds and degrees. There are defaults on interest payments, defaults on sinking-fund payments, and defaults on principal at the maturity of the issue. Defaults may be complete or partial, according to the circumstances surrounding each case. that reason it is extremely difficult, if not impossible, to make an entirely satisfactory classification of them.

For

Sinking-fund defaults are practically coextensive with interest defaults. However, even when the interest default is only partial, the sinking-fund payments will usually be in complete default. Occasionally sinking funds have not yet become operative, according to contract provisions, and the loan may be in default on interest and not on sinking-fund payments. Frequently, too, governments and corporations suspended sinking-fund payments in the hope that the

27 On Jan. 1, 1934, the (weighted) average prices of listed foreign bonds was as follows: All foreign bonds, 75.90; European national, 105.28; European subdivisional, 67.69; South and Central American national, 27.13; South and Central American subdivisional, 21.37; Asiatic National, 110.31; Asiatic subdivisional, 67.18; Australian national, 86.91; Australian subdivisional, 84.88; all foreign Government bonds, 80.21; all foreign corporate bonds, 64.77; and all American bonds, 85.11.

interest could continue to be paid. Occasionally this proved to be the case; in other cases complete default followed. Sinking-fund defaults, other than issues also in default on interest payments, amounted on March 1, 1934, to about $130,000,000.

Defaults on principal, other than sinking-fund defaults, amount to about $30,000,000. This total is exclusive of defaults of long standing, such as those of China, Mexico, and Russia, and of those cases where the security holders have agreed to an extension.

TABLE 25.-DEFAULTS ON INTEREST PAYMENTS ON OUTSTANDING "AMERICAN SHARE" OF FOREIGN DOLLAR BONDS

[Defaults as of Mar. 1, 1934- Amounts outstanding as of Dec. 31, 1933. In millions of dollars]

NOTE.-The "American share" was calculated by allocating to this country the same proportion of each issue outstanding on Dec. 31, 1933, as was taken here at the time the issue was originally offered. Actual American holdings of defaulted foreign securities are probably from $250,000,000 to $500,000,000 less than the total given above as a result of repurchases by foreigners.

These data show that, while 32 percent of our foreign bonds are in default, only 43 percent of the defaults may be classed as complete, or 14 percent of the total bonds outstanding. Complete default is not, however, synonymous with repudiation. The fact that part of the defaults are partial accounts for the smaller percentage decline in the estimated yield from our foreign securities than the percentage of bonds in default-25 percent compared with 32 percent.

Defaults on domestic obligations arise almost solely from the inability of the borrower to make the necessary payments in the local currency. Defaults on foreign obligations arise from other factors as well, namely, the inability of the borrower to convert the local currencies into the currency required for payment, and political conditions-revolutions. All these factors, or causes of defaults, were present in important degree in the defaults on foreign dollar bonds, although it is impossible in many cases to ascribe the chief influence to any one cause. Revolutions were a factor in a few Latin American defaults, but probably the defaults would have occurred anyway, as a result of purely economic causes. Because of sharp declines in the exchange value of the currencies of many debtor countries, foreign issuers that were perfectly able to make payments in their local currencies in sufficient amount at the par of exchange to maintain service on their foreign obligations, were hard-pressed or utterly unable to make payments in the required foreign currencies. In still other cases the issuers found themselves able to maintain full service on their foreign debts, even though their currencies were depreciated, but the central government of the country decided that the burden of such

payments was so great that the internal stability of the national currency was endangered. In these circumstances, moratoria were declared on foreign-debt service and/or rigid exchange controls were established. The purposes of such measures-ostensibly, at leastwere to protect the gold basis of the currency by preventing the export of gold except under license, and to allocate the available exchange to the uses considered most necessary for the welfare of the country. Decrees of this character were issued by the Governments of Austria, Brazil, Chile, Colombia, Germany, Hungary, Peru, Uruguay, and Yugoslavia, and, in somewhat modified form, by Bulgaria, Costa Rica, Greece, Rumania, and El Salvador.

It should be useful to explain and illustrate the different classes of default. The first class-payments made in foreign currencies and then converted into dollars at the rates of exchange current at the time payments are due-applies to the defaults of the Province of Buenos Aires and the Republic of Uruguay. The foreign-currency payments are made in an amount in pesos equivalent at par of exchange to the interest due in dollars. With the depreciation of the dollar in terms of foreign currencies during the latter part of 1933, American holders received a larger part of the interest due them than they did earlier. There is one difference between these two cases. The Province is paying any balance due, after the pesos have been converted into dollars, in scrip, while the payments by Uruguay, if accepted, are in full satisfaction of the coupons.

A second class-payments made partly in dollars and partly in scrip-applies to the defaults by Bulgaria, Colombia, Costa Rica, Guatemala, Panama, and Germany. The scrip, except in the case of Germany, is of moderately long term, and in some cases bears interest. It represents the funding of part of the interest due, and the purpose of the arrangement is to provide temporary relief to the budget or exchange position of the issuer. The German scrip, on the other hand, is not interest-bearing and does not have any fixed maturity. Its purpose is the improvement of the German exchange position, primarily through enabling the Government to assist German exporters. The general features of this plan have been described elsewhere in this bulletin.

Only one country-the United States of Brazil-adopted the policy of paying all the interest due in its own obligations-that is, in funding bonds. This plan was adopted in 1931, to be effective until October 15, 1934. On February 5, 1934, Brazil issued a decree setting forth a new plan for servicing its own foreign loans and those of the Brazilian States and municipalities for the years from April 1, 1934, to March 31, 1938. According to this decree, partial payments in dollars will be made in complete satisfaction of interest coupons on issues that had been in default or had been receiving payments in scrip.28

Partial payments in dollars in complete satisfaction of the interest coupons are being made by several European and Latin American issuers. In some cases, arrangements were made with bondholders' protective committees for partial payments for a period of years, to be followed by the resumption of full service.

28 For the details of this decree see Special Circular No. 396, Plan for Servicing Brazilian Foreign Loans, issued by the Finance and Investment Division, Bureau of Foreign and Domestic Commerce, Mar. 24, 1934.

Some of the issues listed as being in complete default are in default because of government-exchange restrictions or moratoria decrees. The Austrian and Hungarian decrees provide for the deposit of interest in schillings and pengo, so that, in one sense, the default is not complete, although as American holders of the bonds are affected, it is complete. Furthermore, many of the defaults on Brazilian State and municipal issues, Chilean Mortgage Bank issues, and Colombian departmental and municipal issues were caused, at least at the time they occurred, by central government decrees.