The Financial Perils of Poland

One loan agreement, but many larger problems remain

After months of bitter and frustrating delays, Western bankers and representatives of the Polish government finally signed an agreement last week that permitted Poland to stretch out the payment of $2.4 billion in loans, which were actually due last year. The solemn signing at the glass-and-aluminum-sheathed headquarters of the Dresdner Bank in Frankfurt removed one obstacle to the start of talks on extending the deadline on $4.6 billion that Poland is scheduled to repay banks and governments this year.

Bankers, who once feared that their Polish loans might become total losses, seemed satisfied with last week's settlement. It requires the Poles to pay a stiff 1.75% above the basic international lending rate (currently 15 1/2%). Warsaw is to repay $120 million this year, and the remaining $2.28 billion in twice-a-year installments beginning in December 1985. Notes an official of one of the 500 banks that took part in the agreement: "This all demonstrates that Poland has the ability to do more than people thought it could."

Last week's accord, though, did not clear the path to resolving fully the lingering Polish debt crisis. The U.S. and its NATO allies have said that they will not consider rescheduling the $2.2 billion owed to Western governments unless Poland eases the martial law that was imposed on the country last Dec. 13. The hard-line Western stand effectively bars banks from seeking a separate agreement.

The Frankfurt pact is unlikely to mean renewed Western lending to the rest of financially strapped Eastern Europe. The Soviet bloc owed the West some $80.7 billion at the end of 1981, up 11.4% from 1980. Major debtors include Rumania, Hungary and the German Democratic Republic. Rumania, which owes $9.6 billion, missed an agricultural-loan payment of $5.5 million earlier this year, but it has since been paid off.

The long-running Polish debt drama has effectively dried up Western lending to any Soviet satellite country. Even a relatively good credit risk like Hungary can no longer raise long-term funds in the West. Says Janos Fekete, deputy president of the National Bank of Hungary: "If one house is on fire, there is a natural tendency to expect the house next door to catch fire as well, even if there is no reason why that should happen."

The Communist debt problem is not limited to the small East European countries. The Soviet Union's Western debt of $19.5 billion is second only to the $22.4 billion that Poland owed at the end of last year. Analysts consider Moscow's burden more manageable than Warsaw's, however, because the bigger Soviet economy is in a better position to pay off its creditors.

The Soviet economic outlook, though, continues to deteriorate. Last week Moscow officials indicated that the disastrous 1981 grain harvest had been worse than previously thought. The setback may force the Soviet Union to increase gold sales to raise cash. The Soviets have already sold roughly 300 tons of the metal to obtain about $3.5 billion. The Kremlin is using the proceeds to pay for food and other imports, and to aid its satellite countries. Meanwhile, Western moneymen, who used to help the Communist world get out of such economic troubles, are on an extended bank holiday.

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