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j**' Poland: Assessment of Rescheduling Possibilities
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Mar 21
snMWJ1** Stephen Larrabee UMito assess the likelihood that umjPoland will multilaterally reschedule LiMiits hard currency debt.
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Poland'9 externalfltl positionis the Westto deteriorate, it is unlikely that Polar Uatj-'ill reschedule its'hard currency debt ot tiMtA formal, multilateral basis. More like!
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APPROVED FOR RELEASE.
wa do not expectormal, multilateral rescheduling will take place In the near future. Poland seems very reluctant to reschedule
Moreover, even though its already desperate financial position Is likely to continue to deteriorate, Poland may be able to stay financially afloat without rescheduling because: ankers may prefer rollingis, renewing--loans aa they fall due toefault or to subjecting themselves to the enormous negotiating problems involved inescheduling;oland can probably borrow new monoy to finance imports, both through government-backed and strictly commercial (unbacked) loans, as exporters in the Westeriod of slack world demand continue to pressureand bankers alike to facilitate exports to Poland)t is quite possible that the USSR would provide assistance to Poland toescheduling that could be harmful to Soviet political interests on many count... Finally, should Poland actually try to reschedule, there la no guarantee that the attempt would succeed. The principal obstacles to achieving an agreement acceptable to all parties include the difficulties
Western creditors would have in agreeing among themselves on terms, the fact that Poland isember of the IMF, and the likelihood that Poland in any event would not accept the type of economic stabilization program that its creditors would requireondition of rescheduling.
In any event, we do not expect that Poland's external financial position or domestic economy will be much affected by whether it reschedules or not. Poland is already rolling over its debt. Ais basically another type of rollover, different more in form thanis not likely to have much substantiveOLAND'S EXTERNAL FINANCIAL SITUATION
Poland is, indisputably,erious balance of payments predicament, as we explained In detail in two papers we forwarded to you on Marchof the a/ Polish Economy" and "Projection of Poland's Balance of Payments." To summarize briefly: Poland failed dismally In its attempt to reduce sharply its hard currency deficit The merchandise trade doficit fell0 millionillion. At the same time, the deficit on invisibles climbed by0 million as interest payments continued to rise. esult, the current account deficit rose slightly to ne.irly S3 billion.
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By the endoland's gross hard currency debt had risen toillion. The ratio of debt service payments to earnings from merchandise exports and Invisibles jumped fromercent8 toercent The Poles appear to have had little ii any success in lengtheningtha maturity of their debt. Ofillion in medium- and long-term debt, aboutillion falls due0 Of theillion, overillion is cornmercial debt [not government-guaranteed) ittle less thanillion is government-backed. In addition, Polandhr>rt-torm debtabout S3 billion, asjaesea
Further deterioration in Poland's.balance of payments is expected this year, with the borrowing requirement likely to soar to aboutillion7 billionaising this sum will require strenuous efforts. Indeed, some of its recentto reschedulinge facto, piecemealextreme pressure on
Warsaw to cone up with the required hard currency. I
does the future promise improvement. Our estimate
- Is that, even if Poland holds real GNP growthercent
ear and has reasonable success in Increasing its exports,
the current account deficit will continue to rise and the hard
currency debt willillion byith a
debt service ratio of ovorercent.
Theaccordingress report, was actually negotiated by tho French andarontecd but still carries
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He believe that both Poland and the USSR prefer this ad hoc modus operandiolitically less embarrasing alternative. Furthermore, it also appears feasible since:bankers,runch, would prefer rolling over debt to outright default, with the embarassmcnt and material damage to the banks that would entail.private banks may refuse new funds in the form of untied loans, Poland can still count on some new loans to finance its current account deficit. Polandailable sizeable Western government-backed credit lines for the purchase of machinery and equipment and other commodities. Also, Warsaw presumably will be able to obtain at least some new government-backed credits as Western governments strive to help their market-hungry exporters. Moreover,
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banks, likewise under pressure from customers eager _to export to Poland, ray extend some unguaranteed supplier credits. Powerful Western export interests, particularly in tho current period of slack demand, are far more interested in selling to Poland than in restor order to Warsaw's finances, mmWM
USSR can probably be relied on to provide some assistance in some formolish balance of payments crisis appears imminent. (Indeed, there are indications that Poland is already receiving Soviet aid. Reportedly, Moscow will permit an increase in Poland's trade deficit with theove that would facilitate increases in Poland's exports to and/or decreases in imports from the non-Communist world. There are also reports that Council of Mutual Economic Assistance financial Institutions are giving direct hard currency loans, presumably at Moscows direction, tc Poland.) Moscow Is probably somewhat ambivalent about rescheduling. Although no Warsaw Pact country has ever rescheduled multilaterally, thu USSR may not,trictlyeconomic point of view, object to rescheduling to the extent that it would spare the USSR from having to use its own resources to bail out Poland. But the USSR would be loath to accept tha Westernin Poland's economyescheduling might 'ji well involve. IndeeJ, the political reasons forescheduling could well outweigh the economic reasons for supporting it in Moscow's thinking Ideological and prestige factors would probably persuad the Soviets to provide the economic assistance necessar
toescheduling with Western creditors.
The exampleocialist state publicly appealing to Western bankers to save itself from Its own economic and financial ineptitude wouldevere blow to Soviet claims of the superiority of "th* socialist economic system." Furthermore, rescheduling would probably oblige Warsaw to Impose restrictions on its economy at the direction of Western creditors and compromise Party control of economican ideologically unpalatable proposition. Soviet assistance to stave off rescheduling, moreover* could subject the Polish leadership to additional Sovfe political pressures to alter Polish domestic policies.
RESCHEDULING ATTET.PV MIGHT FAIL
If Poland docs optormal, multilateral reschedulin the effort could fail, since it.is by no neans certain that Western lenders couldut an acceptable arrangement with the Poles.
Negotiating multilateral reschedulingsengthy and complicated process that has almost invariably involved participation by the International Monetary Fund. The IMFital role in several waysi by providing technical and advisory services to both debtors and creditor clubsj by setting up standby arrangements that provide financial assistance to debtor countries on the basis of austerity
programs that creditors insist onondition of rescheduling; and by evaluating developments in debtor countries after rescheduling to insure that conditions are being met.
Poland isember of tho IMF,previous indications of interest init likely to become cne amidst the heightened East-West tensions created by the Soviet invasion of Afghanistan. Furthermore, Poland isWesternexpand or intensify the austerity measures already adopted. First, as our calculations suggest, even reducing economic growth to the pnint where per capita consumption ceases to rise would probably not arrest the deterioration of Poland's balancc-ol-payraents position; further restraints on economic activity would presumablyerceptible drop in living standards that the regime would be unvilling to risk. Second, it is dubious that Poland would agreeestrictive program with teeth imposed by industrialized capitalist countries, f
There arc other obstacles to rescheduling. Most of the debt falling due in the next twois presumably what tho roles would seek to reschedule at ais unguaranteed commercial debt. Past experience indicates that reaching agreement among creditors is much more
difficult for strictly commercial debt than for government-backed debt, amount of Polish debt, comraerclal and government-backed, is enormous. Previous reschedulings, almost always with LDCs and almost always confined to official credits, generally have been for no more0 million, in the Polish case, however, several billion dollars worth of debt would certainly be included in any comprehensive rescheduling. Anillion would be involved even if only half of Poland'sand long-term debt dueeree huge sums involved would likely intensify the inevitable disputes among creditorn on how to share the rescheduling burden equitably, fff
Warsaw's private creditors, and possibly Warsaw itself, would seek to include government-backed debtescheduling This could lead to further dispute, with governments and private debt-holders arnuing over the distribution of the
burden. USG policy, in particular, stipulates that public
nnd private, debt must bo comparably treated, meaning that ^.
tha cost of debt rescheduling must be proportionally shared
between the government And private sectors.
WOULD RESCHEDULING REAL!A"irTEREHCE?
Whether or not the Poles reschedule formally or continuerolling over their debt piecemeal ia not really of any
substantive difference. Rescheduling is.inollover
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formal, explicit, organised, comprehensive, coordinated rollover with humiliatinga rollover nevertheless. It differs frnm the current rollover methods, generally known ashat Poland is employingmainly in form. To quote one expert discussing the distinction "What is the differenceescheduling of debtsew loan /which in this context refers tot is nearly metaphysical. The economics are thefa repaid later rather than now. It is the psychology whichreschedulingonfrontation, an admiasxon of failure, an emotional catharsis,ew loan /refinancing^ is business as usual.". (David Beim, "Rescuing theoreign Affairs,) fWQ
What does matter is whether Poland can, assuming it rolls over existing debt in one way or another, raise new funds to finance its current account deficit. Itso conclude new borrowings does not seem to hinge on whether it reschedules or not. Success or failure in adding to its debtunction of such variables as bankers' confidence and pressure from Western exporters on their governments and bankers,hirh are not necessarily or even probably influenced by whether or not Poland has rescheduled.
Inability to raise new funds would impose considerably^ more restraint on the Polish economy. Poland would in effect
.have no choice but to balance its current account, obviously s'flifficult blow to absorb. Bowever, the cut In imports this would presumably entail need not necessarily be politically destabilizing if Poland makes further cuts in capital goods purchases abroad rather than in imports of materials and consumer goods.
The worst case ofthat nobody would want and one that we certainly do notnot merely be.Inability to raise new loans but also outright default on existing debt. Here, too, Poland would be required to balance its current account. But the legal consequences of default could seriously interfere with the normal conduct of the trade. Jfg
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Original document.
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