Don't rush to declare Poland in default

Poland's debts to the West are much in the news these days. The Poles have been delinquent in meeting those obligations, and with as much as $25 billion due pressure is mounting in some official circles, particularly within the Reagan administration, to have Poland declared legally in default. That may seem to be an obvious step to take, but it could be a blunder.

A declaration that Poland is in default would require Western bankers finally to write off claims against Poland that they have in their portfolios. They are understandably reluctant to do that while there is any hope that Poland will make good. With default, Poland's creditors could try to seize Polish assets abroad, but the amount of such assets is very limited.

The alternative to default, of course, is that Western creditors agree to reschedule the Polish debts. That they already have been doing, and they apparently wish, for the present, to continue to do so.

So far as banks do lose, it is difficult to weep over their predicament. They were imprudent to lend Poland the vast sums that they did.About one-fourth of the total Polish debt outstanding, however, was lent or guaranteed by Western governments, and Western governments rather than banks would bear the losses to that extent.

But what is mainly at issue is a political question concerning the West's policy toward Poland in its present dire circumstances. From that standpoint, it might seem that having Poland declared in default is all the more in order. That would mean the practical exclusion of Poland from Western capital markets for some time to come. Those urging a declaration of default hold that assuring such exclusion is just what we must do in response to the Polish government's own declaration of martial law.

That is certainly an appealing argument. But, if dissidence flourished for a time in Poland and Solidarity was able to gain a footing there, probably not the least of the reasons was the restraining influence exerted by Polish financial dependence on the West on Poland's authoritarian communist regime and its Soviet masters.

Grim as the outlook now is in Poland, it is too early to conclude that that source of restraint has exhausted its possibilities. The Polish economy is down-and-out. Although the Russians reportedly provided Poland with some $4 billion of aid last year, how much of that was in hard currency, usable in meeting obligations to the West, as distinct from Soviet goods, is another matter.

The Russians in any event are having problems in paying their own debts to Western creditors, and their economy continues to be beset with difficulties internally. They cannot be exactly eager to have the West withdraw from financing the Polish economy.

In short, Western credits might still be exploited as a bargaining counter to assure survival of a modicum of Solidarity's heartening but overly optimistic program. In the end, a declaration of Polish default may be unavoidable, but to precipitate such action would be to nullify the limited leverage that the West has over political developments there.

Poland is in deep difficulty financially, but it remains to say that among Russia's East European allies it is by no means alone in having incurred an imposing volume of debts to the West. It is also not alone in experiencing difficulties in meeting such obligations.

Romania, for example, is clearly in trouble in carrying its more than $8 billion debt to the West. At the Romanian government's request, Western creditors have just agreed to reschedule some of those obligations. Russia's East European allies together owed the West as much as an estimated $54 billion at the beginning of 1980.

The vasj total epitomizes, as perhaps nothing else could, the meaning of detente for East-West economic relations. It is only in the last decade or so, after the tensions of the Cold War had abated, that the East European communist countries have been able to borrow and the West willing to lend on such a scale.

And if the credits to Poland have been excessive commercially, that is apparently also true of the credits to Romania. There are often reasons to wonder at the commercial soundness of the West's loans to Russia's East European associates more generally.

Here, too, however, there have been some political gains. Thus, Romania's Ceausescu has probably been able to pursue his own inclinations (as distinct from Brezhnev's) in foreign policy to a greater degree than he could have done otherwise because of his access to Western credits. As for Poland, so for other East European allies of the USSR, the West must carefully weigh all of the consequences, political as well as economic, before it severs entirely its financial ties with them.

Russia, too, as indicated, has been borrowing from the West and has been encountering difficulties in meeting the resultant obligations. Lately the USSR has been asking Japane3e and West German business firms to defer maturities on credits that they extended to that country.

The Soviet difficulties, however, are probably of a short-run sort, reflecting mainly the recession-reduced Western demand for Soviet exports and last year's grain crop failure, the third in a row, and the resultant need for sizable grain imports. With 1980 gold reserves at an estimated 58 million ounces or $22 billion at today's prices, the USSR should still be able to service a hard currency debt that has lately amounted to about $10 billion or less than 1 percent of the Soviet GNP.

The Soviet stringencies, though, expose even more clearly than had been done before a curious misconception under which some Western banks have labored: because of their system of planning, it has been assumed, communist countries must be immune to commercial crises such as create international financial stringencies in the West. For those preferring Western markets to Eastern planning systems, exposure of that particular fallacy may be among the more significant positive outcomes from the whole experience with detente in the West's commercial connections with the East.

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