The Financial Situation

Old Prejudice Against Foreigners Recurs In Bond Market

MERRYLE STANLEY RUKEYSER

THE ancient Greek notion that all foreigners are barbarians still obtains in many quarters of the investment world. Despite its recent emergence as the world's great creditor nation, America is still somewhat provincial in regard to financial matters. The purchaser of securities discriminates against alien issues. Many of the best foreign bonds yield between 7 and 8 per cent, while the highest grade domestic issues, reflecting the passing of abnormally high money rates, are drifting toward a 6 per cent basis.

Before the war, when the United States was traditionally a borrower instead of an international lender, European government issues sold on a 3 per cent basis of return to the investor.

If one could depend on the hints of a crystal ball, which indicates that all the foreign governments would meet their obligations both in respect to principal and interest, one would be foolish to take domestic issues which offer less. Obviously, the difference in price measures the rough judgment of the marketplace as to varying degrees of safety. If market price were an absolutely dependable gauge, the whole element of mystery and uncertainty in finance would disappear, and there would forthwith be fewer post-mortem revelations of financial bad judgment at the surrogates' courts.

From the ticker quotations then, one reads the story that the composite view of American investors is that high-grade domestic securities are safer than the choicest of foreign issues. Part of this mass opinion is merely a survival of the aversion to things foreign. Part of it is a realization that investment abroad, particularly in governmental securities, involves a political risk.

IT is futile to argue whether domestic issues are better than foreign. The matter cannot be intelligently argued in the abstract. Many foreign bonds are infinitely better than American issues, but the fact remains that, other factors being equal, the investor prefers the domestic obligation. Patriotism may be a factor in this, but, if the investor wishes to yield to unselfish impulses, he ought to realize that investment in alien securities would help to relieve economic maladjustments which tend to paralyze foreign commerce.

Before America attains a full measure of its new prestige as the banker for the whole world, it will no doubt send streams of capital to ports hitherto beyond the range of national investment. Europe, Asia, South America, Africa and the surrounding islands, all are suffering from retarded development, and are yearning for the means of financing material growth. At the old tellers' windows of world finance many would-be borrowers are denied accommodation. More and more they turn to New York for aid.

With this great competition among borrowers, American lenders can afford to be critical.

Recently, while war-shattered Europe has suffered a loss of financial prestige, South American countries have enhanced their hitherto none too spotless reputation. Canada is regularly in this market, and enjoys good credit. Only a few days ago one of the Australian states—Queensland—made its debut as a borrower here. Around the market place it is known that American bankers have despatched representatives to South Africa to see first hand the opportunities for investment. Another example of America's activity in international finance is Mr. Thomas W. Lamont's mission in Mexico. Representing holders of Mexican bonds in all parts of the world, this member of the firm of J. P. Morgan Company—who only a few months ago arranged the machinery of the Chinese consortium, which is now theoretically ready, but practically unable to finance China's needs—has gone to confer with President Obregon on a technique for restoring Mexico to financial respectability. Since 1914, Mexico, under the control of successive revolutionary chiefs, has paid not a single cent of interest on its bonds which foreigners hold. The interest in arrears exceeds $40,000,000.

Broadly speaking, dollars could be lent with greater assurance of safe return in the western hemisphere than in the eastern. The Americas have not suffered the staggering blow of the World War in the same sense as Europe. But bankers have always recognized that the basis for credit is character. Europe, particularly France, has historically had a better appreciation of the moral obligations of the debtor to the creditor than the more fluctuating countries in South America.

International bankers are beginning to think more highly, however, of the credit standing of the principal South American countries, notably Brazil, Chile, and Argentine. The feeling is that during the war and the international contacts incident to the settlement of the conflict, the more advanced South American countries gained an unprecedented appreciation of the value of cooperation among nations. One banker of international reputation, in discussing this changing viewpoint, said that, because of this development, he considered a default by Brazil, Chile, and Argentine much less likely now than at any previous time in the history of the three nations.

NOTHING is absolutely safe in investments. In human affairs, the element of risk cannot be completely eliminated. For comparative purposes, however, Liberty bonds and Victory notes may be looked upon as par. Foreign securities rank in varying degrees below United States government issues. The obligations of Canada and Great Britain deserve to be classed close to the best, most observers agree. The Chilean, Argentine, and Brazilian issues rank with most of the continental European bonds.

In the Old World, the credit of nations gets worse as one moves eastward. Great Britain is rated first, then the countries of Western Europe, and last the nations of Central Europe and the Near East. Any rating of the European bonds is necessarily arbitrary. After consultation with the best financial minds in the country, a group of investment specialists rated them in this order: Great Britain; Denmark, Sweden, and Switzerland; France, Belgium, and Norway; and Italy.

Europe is still seething with burdens related to the war. The validity of all government obligations depends to a degree on the permanent results of the limitation of armaments conference at Washington. If the leading nations can work out a program for desisting from the present economically ruinous expenditures for things military, international solvency will become measurably less doubtful. Unless the world is to drift into financial destruction, the economic appeal will have to accomplish what idealistic impulses thus far have failed to do—limit armaments and compose international differences.

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The balance sheet of Europe hinges too on reparations, an economic matter which was decided upon by politicians, Germany completed its 1921 instalment on August 31 last largely on borrowed funds. Another payment is to be made on November 15 in connection with export taxes. Many observers believe the terms cannot be fully carried out, and the tumbling of the German mark into the pit of worthlessness is a warning signal. Economically, Germany is recovering, but, financially, it is in the "After us the Deluge" stage.

IF a readjustment of the reparations plan were made, it might have a serious effect on the financial position of France and Belgium, but if unaccompanied by a fresh outbreak of war, it would scarcely impair the ability of either. country to pay interest on their external debt. A fresh outbreak of warfare on a large scale would jeopardize the position of all continental securities, if not permanently, at least temporarily, In any readjustment, Great Britain would probably be least affected and, if the change were peacefully made, the strongest European neutrals would not be so adversely affected as to be unable to meet interest payments. Of course, if, on the other hand, Germany meets its reparations payments in full on the present basis, the Allied nations which are the beneficiaries will receive large revenues.

The other bugaboo in connection with investment in European government issues is the possibility of new violent social revolutions. The spectacle of Russia is still vivid. Under the control of former outcasts, the Russian government has repudiated the national debts of previous regimes. Since the event happened in Russia, it cannot be regarded as theoretically impossible elsewhere. The misery associated with the Russian experiment, however, is likely to act as a deterrent for others. In spite of the terrifying ghosts which add to the risks of investments abroad, Americans in the last two years have been absorbing foreign securities at an unprecedentedly rapid rate. More than $1,000,000,000 of foreign securities have been marketed in the last two years.

Foreign bonds deserve a place in the investment scheme of the ordinary person, but diversification is advisable.

The ratio of foreign to domestic bonds should not be too large. One-fourth would seem to be enough in most cases, but each individual's needs vary,

The foregoing discussion has related to the external bonds of the strongest foreign governments, securities representing promises to pay interest and principal in dollars. Internal bonds of hie same countries, which were created for home distribution, are payable in pounds sterling, francs, lire, and milreis. The latter involve a speculation in the market value of the foreign exchanges, which go up and decline as bubbles in the air. The risks associated with the purchase of internal securities are greater, but the promise of reward, in case all is well, is larger,

IN urging the broad economic desirI ability of exporting dollars, William S. Kies, chairman of the First Federal Foreign Banking Association, remarked: "The people of this country must adopt a broader viewpoint of their opportunities and responsibilities in the present abnormal world conditions. To continue to receive the world's available gold, to pile it up in our treasury vaults, and to hoard our surplus wealth and capital is to act the miser at a time when all the world is in need. Failure to use our great wealth and our inexhaustible national resources for the benefit of the world, is either a confession of our lack of brains and ability to do constructive thinking, and to assume the mantle of financial leadership which has fallen to us, or what is worse, an admission of a mean and selfish provincialism which renders us insensible to the wants of the world, a thing in itself unthinkable, and entirely inconsistent with the spirit and the soul of a nation that sent four million of its bravest and best young men to the fighting line in defence of the ideals of liberty and democracy",

That is all very well, but the investor who purchases foreign securities of the present day muddled world must remain eternally vigilant and critical to make sure that his principal is safe and his interest return regular. Discrimination and expert advice will be necessary to select securities only from governments and institutions which have more than a fighting chance to remain solvent.