The Polish Debt Syndrome
WHITMIRE, JAMES M.
ATHREAT TO THE WEST The Polish Debt SyftCllXJtTlC BY JAMES M.WHITMIRE The continuing unrest in Poland, precipitated by the spontaneous wave of strikes this summer that for the first time led to...
...Executives of the Polish Handlowy Bank—the government's foreign trade bank—pressed the foreigners for an additional $500 million loan...
...Not surprisingly, banks had begun to quickly "roll over" Polish and other East European debts—as loans came due, new ones were issued to take their place...
...The primary concern of a banker is to preserve what critics disparagingly refer to as the "illusion of liquidity...
...Reeling under the impact of a 2 per cent decline in 1979 GNP, a fifth straight bad harvest, rising oil prices, and severe credit withdrawal pains, the Poles turned Westward for additional hard currency quick fixes...
...At this point the Western banks already were trapped in their own web...
...Fortune magazine has reported that the bankers at the meeting solicited a quid pro quo from the Poles: More hard currency would be forthcoming if the Polish regime would impose austerity measures designed to squeeze money out of its economy and repay old debts...
...Today, Poland is even deeper in debt and less capable of repaying its debts than before the strikes...
...Financiers recognize that a large debtor, such as Poland, has tremendous influence over its creditor banks, for it can destroy them by refusing to repay...
...It is the symbolic and psychological effects of debt repudiation that are most feared, for a large default could well spark a panic reminiscent of 1929...
...Western banks, awash with excess capital due to the influx of opec petrodollars following the 1973 quadrupling of oil prices, eagerly accommodated the Communists...
...For such a default—on debt which by 1985 will be way beyond $100 billion—would, in Communist eyes, have the salutary side-effect of devastating the Western financial system and sapping the economic base of the Soviets' antagonists...
...Observers were stunned by the implications of the situation: Albeit for different reasons, the great bastions of capitalist finance were joining cause with the Soviet Politburo to see the Polish Communist Party through its time of trouble...
...For bankers and Communists both, the events in Poland were a disaster...
...Throughout the 1970s, a moderate Polish economic growth rate was sustained by what Finance Minister Marian Krzak was fond of referring to as Poland's "economic secret": exporting for cash and importing on credit...
...Facing a rapid decline in economic growth rates and increasing popular disgruntlement, Poland and other Soviet bloc countries blitzed Western credit markets for loans to finance consumer sector investment and purchases of Western grain and technology...
...This was to be a pivotal meeting, initiating the next phase of the Polish crisis...
...The grim conclusions of a recent CIA study are being widely reported in the U.S...
...the CIA predicts that by 1982 the USSR will have to import 700,000 barrels of opec oil a day—a severe strain on their hard currency reserves...
...On July 1, the prices of meat and other key commodities were also raised...
...In an ironic intervention on behalf of their debtor / partner, Western banks extended two giant loans to the Polish regime at the height of the labor crisis...
...production in the shipyards, steelmills and coal mines was paralyzed...
...cisely when Poland could least afford to meet them...
...It was in such an atmosphere that equally nervous Western bankers and Polish officials convened last April at the Victoria Hotel in Warsaw...
...This paradox is expressed in an industry axiom: "Make a small loan and you have created a debtor...
...As early as July 1976, the Financial Times of London had observed that private banks issuing loans to the Soviet bloc "have long since passed the point at which they could have cut their losses," and are "likely to make every effort to continue to lend in order to protect the loans they have previously made...
...Not only has consumer sector austerity been abandoned, but the strategy of squeezing the workers in order to pay back the West is no longer a politically feasible option...
...Unless there is an economic miracle, the near future will bring a series of additional Western loans and debt roll-overs in a desperate struggle to ward off the inevitable...
...In addition, to placate the angry proletariat, the regime rescinded the mid-summer price increases and pledged a $3.7 billion package of wage increases and workers' benefits...
...The post-December 1970 efforts to energize the economy through a powerful injection of resources from outside have proved to be economically bogus," he noted...
...But by early 1980 the catastrophic consequences of excessive borrowing converged with a vengeance...
...Complicating the situation is the fact that the Soviet Union will soon become a net importer of oil...
...Should the banks reach their limit and refuse further loans, the Poles could be forced to default...
...The dynamism lasted as long as the influx of extra resources grew...
...The new dilemma was recently summed up by emigre Polish economist Wlodzimierz Brus...
...Two months after the Warsaw meeting, the Polish government doubled the price of sugar...
...What is not yet fully appreciated, though, is that this oppressive burden has locked Poland into a vicious cycle...
...It is estimated, for example, that by 1985 Warsaw will owe the free world almost double what it does now: $39.4 billion...
...According to some reports, it currently exceeds $100 billion...
...Huge debt repayments were now coming due, preJames M. Whitmire, a specialist in Communist bloc affairs, is a consultant with International Business Services...
...On August 12, a syndicate led by West Germany's Dresdner Bank consummated a $670 million loan, and on August 22 a group led by the Bank of America lent an additional $325 million...
...The impact of such a development could be catastrophic for the Western financial system, for it could set off a chain reaction of defaults by heavily indebted Third World countries that are in worse shape than Poland...
...press: Poland has in recent years run up a $21 billion debt, and before the end of 1980, must meet principal and interest payments of $7.4 billion (with a similar amount due in 1981) if it is to forestall default...
...By August Poland was wracked by protests and well-organized strikes...
...But it proved a pyr-rhic victory for the Western banks...
...And the phenomenon threatens not only the authority of the ruling Communist Party, but also the stability of the Western financial system and the future of East-West relations...
...Foreign loans and imported technology had been seized upon by the Warsaw regime as a substitute for economic and political reform...
...It was an accurate assessment...
...Business Week warned last July 14 (before the strikes) that Poland "will be forced to default on [its] debt to Western banks if it does not get the cash [to meet interest paymentslby next winter, and that could bring the debt pyramid of oil importing countries crashing down...
...As a result, Soviet bloc debt shot up to $18 billion in 1974, $48 billion in 1977, and over $80 billion by 1980...
...Domestic economic driving forces were, however, not set in motion...
...The pessimist's view is that Warsaw will go bankrupt, and that this scenario will be replayed in other heavily indebted countries of the Soviet imperium...
...When large debtors have difficulty financing their debts, banks are unwilling to force them into a choice between repayment or default...
...Unfortunately, the bitter realities are that the USSR has its own debt of close to $20 billion to contend with, and the Soviets' economic growth rate is in steady decline...
...make a large loan and you have created a partner...
...Specifically, the bankers raised the issue of the Polish food subsidy system, under which the prices of basic commodities like meat and bread were being kept artificially low at an annual cost to the government of $6 billion...
...ATHREAT TO THE WEST The Polish Debt SyftCllXJtTlC BY JAMES M.WHITMIRE The continuing unrest in Poland, precipitated by the spontaneous wave of strikes this summer that for the first time led to the establishment of an independent trade union organization in a Communist country, has at last focused attention on Poland's massive indebtedness to the West...
...Should that indeed happen, and should it coincide with a period of intense political hostility between East and West, the Soviet bloc might well be tempted to solve its problems by simply refusing to pay back the Western banks outright and en masse...
...Optimists confidently assert that the Soviet Union will, if necessary, bail out Poland by selling gold and oil...
...They hedged and demurred, countering with their own demands...
...By early September, Chairman Edward Gierek had been toppled and the Party had capitulated to the strikers' key demands...
...The episode had cost the Polish economy $1 billion, plus over $500 million in unrealized trade...
...Had the Red Army actually moved in to suppress the strikes, Poland's credit rating with Western banks would likely have risen to a new high...
...The Polish debt syndrome was born in the mid-'70s...
Vol. 63 • November 1980 • No. 20
