1. We have carefully considered what policy to recommend in the
light of your telegram 831 of 26th December. [1] We feel bound to
emphasise the consequences to the general strategy of the war
which will follow if an amicable solution of the Portuguese Timor
question is not secured. There is a serious danger that unless a
bridge is found Dr. Salazar [2] may proceed to the limit of
breaking off relations with the United Kingdom. This would not
merely mean the end of a long alliance but may precipitate Axis
penetration of the Iberian Peninsula. In this event Gibraltar will
become unusable as a base and vital Portuguese islands in the
Atlantic will be denied to us rather than [available to] [3] our
forces. Our air and sea communications through Lisbon to the
Middle [and] Far East and to Australia itself as well as in the
Atlantic would then be endangered. Recent highly secret
conversations with Portugal had gone far to safeguard our position
in regard to the Atlantic islands in the event of Axis action in
the Iberian Peninsula; the results of these conversations are now
in jeopardy.

2. While therefore we realise that Portuguese Timor is vital to
our Far Eastern defences and that there can be no withdrawal until
adequate arrangements are made for its protection against Japanese
aggression we are bound to leave nothing undone which might
prevent a rupture with Portugal and we feel sure that His
Majesty's Government in the Commonwealth of Australia will do all
in their power to assist us. Impatient as we may be with
Portuguese susceptibilities we obviously cannot ride rough-shod
over them in view of the importance to the whole of the allied
cause of continued goodwill of the Portuguese Government at a time
when our resources are strained to the utmost.

3. Your telegram suggests that there are some misunderstandings
about the course of events. We will in a subsequent telegram
endeavour to set them out as seen from this end. The essential
point however is that the reaction of the Portuguese Government to
the entry of allied forces into Portuguese Timor has been most
serious and the question is what is the best course now to take.

4. In all the circumstances we hope that the Commonwealth
Government will agree to facilitate the solution which we have
suggested in my telegram 887 of 25th December. [4] In the light of
the information contained in paragraph 11 of your telegram 831 we
do not wish to suggest that the joint command shall be vested in
the Governor of Portuguese Timor. [5] No British troops other than
Australian are available to go to Portuguese Timor and it was not
intended to propose that additional troops should be sent from
Australia. What we should like the Commonwealth Government
urgently to consider is the possibility of effecting an exchange
between Dutch Forces now in Portuguese Timor and not less than an
equivalent number of Australian troops from those now in Dutch
Timor. As stated in my telegram 887 the Netherlands Government for
their part have already agreed to this proposal. We consider it
important that there should be no weakening of the allied hold
over Timor as a whole; we feel that while the exchange suggested
above would lead to no such weakening it would (though we cannot
be certain of this) offer the best, if not the only, chance of
solving our present difficulty with Portugal.