POLAND: FINANCIAL OUTLOOK

Created: 2/10/1982

OCR scan of the original document, errors are possible

POLAND: Financial Outlook

Polind'a financial silxitioK ei'non the imposition of martial lav hat deteriorated further and now has cow down to default,alalemate with the banks, or delayd rescheduling. Hone of these outcomes will do much eitheraye Warsaw's already chattered hard currency trade and finanoia* relations or to restore its creditworthiness. Prospects remain poor for surmounting the financial hurdles that prevent imports of the raw materials, spare parte, and semimanufactured goods necessary for economic recovery. The economic outlook, therefore, is for continued stagnation and falling standards of tivtng.

Warsaw has notified the banks that the interest due last year will be paid up by Monday, paving the way for signature by March of the agreement rescheduling Poland's obligations1 to private creditors. Bankers generally are confident that the Poles will keep their promise,0 million remained unpaid at the end of January. To be paid on time. Interest payments will have to be made faster than they have been in the post six weoks. f| B

Even if Warsaw fails to meet the deadline,still may not call default. Creditors havethrough many months of Polish moratorium,deadlines, econctnic slump, political Lurmoi

The banks would prefer to keep tho trickle ofpayments flowing and to avoid writing off large loans. The banks hope that Moscow will provide the money, but Polish officials claim that they expect no further Soviet help. |

The likelihood that Poland will be declared in dofaalt will increase, however, if the impasse continues on rescheduling payments duehile Poland falls further behind in its payments due this year. Any ofanks with which Warsaw is behind in its interest .principal payments could declare Poland in default.

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Creditor governments could take similar action on several grounds:

some cases, Warsaw apparently has not paid theercent of principal and interest due1 that was not covered by the agreement rescheduling obligations for official creditors.

payments already are building this year on government-guaranteed credits.

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imposition of martial law makes the regime vulnerablerovision that allows the Western creditors to abrogate the rescheduling agreement under exceptional circumstances.

Consequences of Default

Legal default wouldcramble by private creditors for Poland's assets in the west, the value of which would offsetraction of Poland's hard currency debt. The impact on foreign trade would be United, because it dropped substantially1 and. has fallen further since martial law was declared.

Although the immediate additional damage would be small, being declared in default probably would make it more difficult for Poland to reestablish its creditworth noss and delay access to new loans. The stigma of default would be difficult to overcome, and suits and claims could tie up Polish financial and commercial relations for some time.

Impasse Without Default

If the impasse continues beyond next weekeclaration of default, Warsaw would still have to place an extremely high priority on paying banks1 interest rather than buying Imports. With reserves depleted and export revenues reducedrickle, there ere few funds left for imports.

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if Poland manages to pay interest and other required fees It will have cleared the immediate financial hurdle. The completion then of the reschedulinq agreement would be the first major economic agreement with the west since martial law. The Poles unrealistically hope that banks would then restore short-term credit lines, allowing some expansion of trade, |

Warsaw's Financial Strategy

Evenrivate debt relief agreement Poland would have to tackle the massive burden ofillion in payments due This year Warsaw owesillion in principal to Western governments and banks, and8 billion to non-Westernnterest charges are estimated3 billion. mLm

The Polish Government apparently has made nodue this year, concentrating instead on meeting obligations With no debt relief arranged, Poland is falling behind in its payments to allcredi-tors at the rate0 million per month. Vj ^

The Poles are likely tooratorium on debt service2 and then pay those creditors most likely to declare default or to extend new credits. Highest priority will be given to paying5 billion in interest to private banks. The Poles and theircreditors also probably will urge governments to open negotiations for debt relief on guaranteeddue to be paid this year or at least ask official creditors not to declare default.

As long as nearly all Western government credits remain blocked by sanctions, Warsaw will not be able to repeat the tactic it employed laet year, using commodity credits extended by Western governments to cover debt service. Even if Warsaw is able to join the IMF late this year, private bankers are unlikely to change their attitudes or to provide much immediate financial help. The Poles* recent announcement that they plan torade surplus0 million for the first half of this year indicates that Warsaw isto ascrlflce imports to pay at least some debt service.

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