“UNTO THE DAY" REVIEW OF U.S. LOAN AGREEMENT

Press, Volume XCV, Issue 28224, 12 March 1957, Page 10

“UNTO THE DAY" REVIEW OF U.S. LOAN AGREEMENT

IBv

“LYNCEUS”

of the “Economist*’)

[From the “Economist” Intelligence Unit)

London. February 26. —The Anglo-American Financial Agreement by which Britain settled its lend-lease obligations to the United States and in addition borrowed 3.750.000.000 dollars from that country has recently been in process of renegotiation. The need I for a review of the agreement arose when the British Government decided at the end of last year to invoke the right to a waiver of the interest payment. This move revealed many dark uncertainties built into the agreement. The time has come to clear these up and to amend the offending clauses.

There are two main uncertainties and one blatant defect in the agreement. The first of the uncertainties refers to the precise mechanism by which the waiver is invoked and the conditions that have to obtain before a claim for cancellation of interest can be made. A formula was provided, trying to set out with mathematical precision what the state of the United Kingdom’s balance of payments should be in a number of preceding years before a waiver demand could be tabled. This formula, however, was based on a pattern of pre-war trade which has ceased to have any relevance to the 1950’5. The second, and even greater, uncertainty concerns the parallel clause which required that if Great Britain pleaded successfully for a waiver in its interest payments to the United States it should automatically apply the same cuts to the payments on its sterling debts to sterling-area countries. This clause, on which the Americans insisted with vehemence when it was negotiated in 1945, was based on the reasoning that the sterling debts incurred by Britain during the war were not commercial debts, but the kind of obligation which, in the case of the United States, had taken the form of lend-lease and was, in large measure, being cancelled. Sterling Debts The Americans, therefore, suggested that if they were ever called upon to agree to a reduction in payments from Britain on the new money borrowed after the war, the highly questionable sterling area creditors should take at least an equal cut. This particular clause was written into the agreement on the assumption that the sterling debts would be made the subject of coherent and comparable funding agreements, and that therefore similar treatment could be given to the manner in which their repayments were implemented. Since no such unified funding arrangements were made, this clause was left high and dry. The basic defect in the agreement was the attempt to differentiate in the waiver clause between capital and interest payments. If it were shown that Britain was not in a position to meet its in-1 terest payments the same arguments could be advanced to justify a waiver on capital repayments. What is sauce for the interest goose should also be sauce for the capital gander.

The insertion of this waiver clause, which has recently been giving so much trouble, was due to the clash between the British hopes that financial assistance, from the United States immediately after the war would take the form of a grant in aid, and American insistence that it should be a commercial operation. Bri-, tain had suggested that a grant in aid would be no more than the repayment of the cash that was disbursed by Britain in buying ammunition and essential imports in the United States after the war had begun but before lend-lease had come into operation. The Americans refused this suggestion, and said that they must extract from their debtors terms at least equal to those which they would incur in borrowing the dollars from their own nationals. “Strings” The United States also insisted on an operation that would have strings as well as commercial conditions—strings that would pull Britain into the comity of the world of convertible currencies and truly multilateral freedom of trade without any discrimination against the United States. There was no waiver about these “strings” in the agreement, but the harsb realities of the postwar world made it necessary to break these strings 10 years aeo —when the agreement was barely one year old. The demand that sterling should be made convertible within a year had to be abandoned after convertibility had lasted a hugely expensive six weeks. Similarly, it was found that there would be no sense in adhering to the demand for nondiscrimination in trade when the dollar promised to become a steadilv scarcer currency. A substantial part of the Anglo-Ameri-can Financial Agreement was, therefore, nullified in 1947.

Another part which has recently been in the melting pot is that relating to the waiver on the annual payments. The waiver was a formula seeking a compromise between the idea of a retrospective repayment and the American demand for a wholly commercial loan operation. The trappings of a commercial loan were kept, but concessions were made for remitting interest in case of need. It was provided that when interest was remitted in respect of any one year, it would be definitely cancelled* In the recent renegotiation of the agreement, two major changes have been made. First, the clause requiring parallel cuts in sterling debt payments if the waiver was invoked has been cancelled. It has at last been agreed by all concerned that there is no means of segregating in the existing sterling obligations the debts that might have been incurred during and as a result of the war. and those that represent subsequent and perfectly normal current transactions. The chance of making funding agreements in respect of war-time obligations, if it ever arose at all. was lost in 1946. All this is now tacitly admitted; and from now on any question of invoking the waiver clause on the American loan will not be complicated by doctrinal interpretations of the parallel sterling-debt clause. Deferred, Not Cancelled

The second and more important change is the extension of the waiver principle to capital repayments, as well as to interest payments. In the course of this extension. however .the character of the waiver has undergone a fundamental change. It is no longer

a cancellation of the amounts involved but has become a deferment of payments. If the waiver is successfully invoked in any one year, it will merely mean that the whole scale of annual repayments will be shifted forward by one year. What may be waived, say, in 1958 will become due in 1959. but will then push the close of the period during which annuities on the loan are to be paid from the year 2001 to the year 2002. In other words, under the amended agreement the immediate relief secured by invocation of the waiver will be greater, since it will apply to both capital and investment payments; but that relief will be secured at the cost of incuiring similar liability in the early 2000’s. It may be argued that this is a justifiable case of shifting burdens incurred in fighting a war to a future generation for whom presumably that war was largely fought. It may also be argued that it is good business to remit the repayment of debt in so far as currency depreciation would ’i due course mean that those debts are honoured in terms of a less valuable dollar. Finally, it can be argued that this is a case in which the dictum, “Sufficient unto the day is the evil thereof,” can be justified.

The course actually chosen may have been required by the demands of domestic American politics. It does not make any more impressive a showing for that. The present crisis provided an opportunity for a courageous and fundamental revision of the weight of a barren international indebtedness that has been left as a damaging legacy by the Second World War. That opportunity has been allowed to slip. It is almost certain that in the foreseeable future the need for reconsideration of these fundamentals will recur.