Lending to Communist Nations

The $70 billion dilemma spotlighted by Poland's crisis

The paradox could hardly be more striking. Poland, a Soviet bloc country whose economy is based on Marxist-Leninist dogma, is appealing to the capitalist West for financial aid. Warsaw has asked Washington, to which it is already in hock for $ 1.2 billion in assorted credits, for another $3 billion in assistance. The Polish government clearly needs the cash: it must pay off foreign lenders and continue to finance the food imports required to keep the Poles from becoming more restive than they are.

The State Department announced last week that the Carter Administration put off a decision on the aid indefinitely, leaving the matter for its successor. But Washington officials were already raising questions about the security of Western loans to East bloc nations, which now total about $70 billion. The matter is also increasingly being seen as a test of Moscow's willingness to bail out its overextended satellites. "It is not just a question of loans and credits and money," says a senior member of the Belgium banking community, "but a supreme matter of state in East-West relations."

Poland's problems go well beyond its immediate need, which is to make good on a balance of $7.5 billion in interest and capital due next year on $21 billion in foreign debts. Already Warsaw must spend 82% of its foreign sales revenue to service such debt. Most of it stems from bobbled efforts to build an industrial base after World War II. Two primary exports, steel and textiles, have been hurt by slack demand abroad. Polish agriculture contributes little either to foreign earnings or domestic stomachs. The workers' strikes, set off by hikes in meat prices, added to the economic breakdown.

Western banks have been happy to lend to Eastern European countries, which they believe are good risks. Communist governments are presumed to be stable. Moreover, the debtors in socialist nations are not firms but governments, and their repayment record over the past 35 years is unblemished. That helps explain why Yugoslavia has been able to borrow more than $7.5 billion from Western banks and why Rumania owes $4.2 billion to private foreign lenders.

In Western eyes, the Soviet Union has contributed to the creditworthiness of the East bloc economies because no one believes that Moscow would allow one of its allies to go bankrupt. True, North Korea defaulted on a Western loan in 1975, but bankers attributed Moscow's failure to bail out Pyongyang to Sino-Soviet rivalry. The Kremlin has helped Poland in the past and could do so again, for example, and today it is flush with funds. Thanks to foreign sales of gold and oil, the Soviets have paid off $2.5 billion in private bank loans. Thus far, however, they have shown no inclination to bail out the Poles. A Polish default on foreign loans might give Moscow an excuse to tighten its hold on the economy or, at worst, grab direct power in Warsaw. don't go bankrupt," as Citicorp Chairman Walter Wriston once said. But they can delay or, as in the case of Iran, freeze payment on foreign debts, even though such moves endanger the profitability and, eventually, the stability of financial institutions. With debts of all borrowing countries to foreign banks now totaling $600 billion, the Polish crisis has raised new fears about the ability of many hat-in-hand nations to repay their loans. Turkey, for example, would be virtually insolvent without West German assistance. Among the developing countries, Brazil has run up the largest foreign debt, about $57 billion, mostly to pay for OPEC oil. The crushing debt has hindered Brazil's attempts to expand its industrial base and has helped push its annual inflation rate above 100%. For political reasons, the government has refused to borrow from the International Monetary Fund, to the dismay of many bankers.

All major banks now routinely assess the credit risks of countries. The Institutional Investor, a U.S. monthly for moneymen, regularly publishes a summary of the ratings cited by world bankers. As the most creditworthy nation, the U.S. is ranked first among the 98 countries listed in the latest survey, while Poland is rated 71st and Zaire is at the bottom. The Soviet Union ranked 27th and Brazil 50th.

If Washington or private banks were to bail out Poland again, it could be taken as a vote of confidence in the Soviet Union: lenders would be saying that they expect the Polish economy to be nursed back to health by Moscow so that it will eventually be able to repay its loans. In the international financial community the prevailing sentiment is that the West cannot afford to turn down Poland's money request for fear of a more pronounced Soviet intervention in the country's internal affairs. Says Lawrence Brainard, a Bankers Trust vice president: "The real issue is what is the price of political stability in Eastern Europe." More broadly, the Polish problem seems certain to alert lenders to the dangers of much offshore lending, which in turn will make borrowing more difficult for impoverished nations around the world.

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