POLAND: HARD CURRENCY DEFAULT LOOMS

Created: 2/20/1981

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SPECIAL ANALYSIS

POLAND: Hard Currency Default Looms

Poland can cover ite hard currency obligations for only another fjo or three months. At that point, barring massive assistance from Weetem goverfsments or the USSR,robably vill default. Some paymente already are being delayed, was)

Poland's financial criaie reflects hard currency debt service obligations ofillion this year, far exceeding the likely value ofbillion. Inrade deficit of nearlyillion in likely if Warsaw contlnuea on ita current course. fmM)

The Kania regime has not been willing to deal with the problem by further cutting imports becauae of the impact this would have on labor l. rest. Instead, it haa sought to obtain government credits, but this approach is breaking down, fjam

Western banks are unwilling to allow any Increase in their financial exposure. Some have already refused to refinance the debt coming doe. fMJtk

The multiplicity of banka holding the Poliah debt and the absence of the IMF or any other institutionofeadership role will make it difficult to arrange an orderly rescheduli r. Althoughmay ultimately occur, the process will take many months and could be precededoratorium on Polish debt payments. ffMM)

If enough nev financing does not become available, Wartaw vill have to cut imports byevel consistent with export earnings. In addition, default could Interfere vith Polish exports as creditors attempt to lay claimto Polish export revenues deposited in Western banks. MJMf

intinued

Avoiding Default

a default could be avoided only if Westernor the USSR provide large new loans and deferon guaranteed debt, western governments, concerned about the outcome of the labor strife and the Sovietto it, have so far been in no hurry to make large new aid commitments. Moscow might provide largesums, but not without political strings, emw

If Western governments decide to support an orderly debt rescheduling so as to avoid economic and political collapse ln Poland, the cost to them will be heavy.

The processcheduling could last well In the inte.-m. Western governments will have toarge portion of Poland's hard currency financing requirements, which now are running at aboutillion per month. The participation of commercial banks probably will depend on how decisively theiract and how thenternal situation shapes up in the next few months.

Broader Implications-v*

Other East European countries would be affectedolish default. Western banks have continued to land money to them on easy terms. wt9

Moscow's failure toolish default, hew-ever, would puncture the widely held confidence in the existenceoviet "umbrella" protecting Westernand call into question the creditworthiness of other Bast European oountries. folish default might hurt some West European banks badly, but Polish debt held byanks is not especially large and probably representsmall share of any individual bank's portfolio, fg

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