THE CABINET: Italy’s Debt

Joseph Caillaux thought he could settle the French debt to the U. S. in seven days. And he failed. Giuseppe Volpi spent twelve days with Mr. Mellon and his associates trying to settle Italy’s debt to the U. S. And he succeeded.

There is small doubt that the time element worked in Count Volpi’s favor, but there must have been other factors as well which enabled the Italian negotiator to convince Secretaries Mellon, Kellogg and Hoover and Senator Smoot as well that Italy deserved the terms she got—the most lenient which the U. S. has granted to any debtor nation, not excepting Belgium.

The Negotiations. There were no clearly developed offers and counter offers as in the negotiations with the French. The two sides got together and gradually worked toward a settlement on the basis of Italy’s capacity to pay. When the terms of the settlement were within reach, the Italians made an offer, the terms of which were carefully veiled from the public. Journalists got the idea that it was for the payment of $2,100,000,000 over 70 years. To this a counter offer was made by the Americans of about $2,500,000,000. From these two offers the final terms were arrived at.

The Terms. The original borrowings of Italy were $1,648,000,000. Interest (unpaid) on these borrowings was supposed to be at 5%, making a total due of $2,138,000,000. The interest accrued and unpaid was however scaled down to 4 1/2% to Dec., 1922, and 3% from then until last June, cutting out about $100,000,000 of interest and making the present total of the debt $2,042,000,000.

Payments will be made on this debt as follows:

YEAR ANNUAL PAYMENT

1 to 5 $5,000,000

6 to 15 14,000,000 to $18,000,000

16 to 25 20,000,000 to 26,000,000

26 to 35 31,000,000 to 38,000,000

36 to 45 43,000,000 to 52,000,000

46 to 55 56,000,000 to 67,000,000

55 to 62 73,000,000 to 80,000,000

These payments add up to a total of $2,407,000,000 for the 62 years. They are officially calculated as repayment of the principal with interest at rates from 0% (for the first five years) to 2% (for the last seven years), but this is done only to save the face of those politicians who have clamored for repayment of every cent of principal. It might just as well be calculated that no principal would be repaid but that interest of from ¼% to 4% would be paid for 62 years.

Comparisons. The fairest basis for comparing the various debt settlements is to discount the future payments to be made by the several countries. Even in this way different results can be obtained by using different rates of interest, but the following comparison uses substantially 4½%, the approximate rate of interest paid by the U. S. to its own bondholders. On this basis the British will pay about 75% of their debt; the Italians 25%. (The French offered to pay 40%, and were asked to pay 60%.)

Reasons for Leniency. The reason that Senator Smoot and other members of the Debt Commission were willing to grant Italy such lenient terms was simple: They did not believe she could pay more. Her soil is not fertile enough to give Italy a big export surplus of agricultural products. She has very little in the way of natural resources. She has very high taxes and few wealthy people. All she has is cheap labor, and cheap laborers are very poor people from whom to raise taxes.

The Future. The effectiveness of this debt-funding agreement depends on its approval by the Italian Government and by Congress. In Congress there will certainly be objection from 100-cents-on-the-dollar men, but the consensus of informed opinion is that the agreement will be accepted. The bitter-enders, especially from the West, will be sure to bring up the argument that, although the U. S. Government is getting only 25 cents on the dollar, the agreement had hardly been made known when Wall Street made plans for lending money to Italy at high rates of interest. The answer to this, so far as it goes, is that the loans Italy gets from Wall Street will be used in building hydro-electric plants and other improvements that will yield a return to pay off the loans, but that Italy will never get any return on the loans from the U. S. Government, which were shot into the air in the direction of the Austrian Army.

Several days after the agreement was made, when it had all been properly embodied in documentary black and white, Count Volpi set his signature to the agreement. Said Secretary Mellon: “Will you express to Premier Mussolini our appreciation of the character of the delegation which he sent to America and of the will to reach an agreement with which they were inspired?”

And Count Volpi read a cablegram from Premier Mussolini: “Please convey to the members of the American Commission the expression of my gratification, voicing the sentiments of the Italian people.”

Then Count Volpi presented a check for $199,466.34 in payment of the odd dollars and cents of the account, so that the total of the debt would come to a round $2,407,000,000. The Count presented another check which was not expected. It was for $5,000,000—the first annual installment of Italy’s payments. Mr. Mellon protested that the agreement calling for the payment is not valid until approved by Congress and the Italian Parliament, and that the payment is not due until next June in any event.

But the Count’s protestations overruled Mr. Mellon: “Our purpose in making this payment now was as a guarantee of our good faith in the agreement that we made and to show the world that Italy intends to carry it out.

“We thought that, in bringing the long negotiation to an end this morning when we signed the funding agreement, it would be a fitting thing to do to seal it with the presentation of our check for the first installment.”

Observers were inclined to agree that the Italian debt-funding arrangement would soon bring France to another attempt at settlement. She is the only great nation that has not come to terms, and the flow of private U. S. credit into Italy after the Italian agreement is an inducement to similar action by the French. Also the French press intimated that France would now expect terms as lenient as the Italian.