Poland: Behind the Crisis (1982) : APPENDIX B


New York Times article of January 26, 1979


Poland, in Bid for Loan, Will Let
West's Banks Monitor Economy

By Ann Crittenden

As part of an effort to obtain a major
new loan, Poland has agreed to permit
Western banks to monitor its economic
policies, American bankers say. They
regard the concession as a historic
breakthrough in financial relations
with the Communist world.

The loan, now being arranged by a group of Western banks, is essential if Poland, the most heavily indebted Communist country after the Soviet Union, is to meet the payments due on nearly $15 billion in debt to the West.

New Information Provided

To persuade the banks to agree to the
financing, Poland has already had to
announce a strict new budget for 1979
and provide its creditors with 
comprehensive new information
on its financial situation.

Moreover, the banks involved in the new credit will henceforth track the progress of the Polish economy, much as the International Monetary Fund monitors the economies of non-Communist countries in financial distress. An initial meeting between Western bankers and Polish officials to discuss Poland's economic program and the pending loan, possibly involving up to $500 million, took place in Warsaw two weeks ago.

A spokesman at the Polish Consulate in Washington confirmed that the country's private creditors would monitor its economic progress in connection with the new loan, which is in the final stages of negotiation, and on future credits as they are required.

Poland's supplying of data was expected to set a precedent that other Communist-bloc nations would eventually have to follow. The Polish developments were also seen as advancing the meshing of the economies of Eastern Europe and the West.

Representatives of 14 banks met with Polish financial officials to discuss the country's economy and to be invited to arrange the new financing at the initial meeting on Jan. 11. Those attending included representatives of the Bank of America, Citibank, the Manufacturers Hanover Trust Company, the Bankers Trust Company, the Chemical Bank, the First National Bank of Chicago, the Security Pacific National Bank, the Bank of Montreal and the National Westminster Bank of Britain.

"We didn't have a blueprint for the Polish economy to follow," said one banker involved in the financing, "but we made it clear that belt-tightening was a prerequisite for any new credits." The meetings with Polish officials," he added, "give Western capitalists a certain say in how the Poles proceed. The purpose of the economic monitoring will be to make sure that Poland follows policies that do not imperil its debt-servicing capacities.

Most observers believe that the Bank Handlowy, Poland's foreign trade bank, will be able to obtain a commitment for at least $300 million to $350 million of the $500 million that it is trying to borrow. This would be enough to forestall an immediate financial crisis. In large part this is because the Polish Government has adopted a stringent new budget for 1979, sharply curbing domestic investment and emphasizing export earnings needed to service the foreign debt.

Embracing of Austerity Cited

"This marks the first time a Communist 
government has embraced austerity 
-- a purposeful cut in its planned
rate of growth -- for balance-of-payments 
reasons," said Lawrence J. Brainard, 
an economist with Bankers Trust.

Poland is not a member of the International Monetary Fund which is the agency that imposes and monitors economic stabilization plans for non-Communist countries experiencing balance-of-payments difficulties. But Poland's heavy dependence on Western credit led it to set up a similar program of economic stringency that will be monitored, not by the I.M.F, but directly by its bank creditors.

In addition, the banks have already been given new data on the Polish economy, including figures on total foreign debt and debt repayment schedules and a breakdown of the balance-of-payments deficit. Much of this information had earlier been given to the United States Government in connection with the official loans made to the Poles, but with the understanding that it would not be shown to private lenders.

Some bankers believe that, because the normally secretive Poles have had to open their books to the banks, other Communist-bloc countries will eventually have to do the same. Once the Polish data is out, others will probably have to follow," said Gabriel Eichler, a specialist on Eastern Europe for the Bank of America.

From a wider perspective, developments in Poland mark a further step in the integration of the economies of Eastern Europe with those of the West. The trend has obvious political as well as economic implications. On the one hand as part of the tight, Western approved budget the Poles are freezing their military expenditures despite Soviet requests for a rise in arms outlays by all Warsaw Pact countries.

On the other hand, some bankers speculate that the Soviet Union might quietly welcome the discipline being imposed on its Polish ally. If the Poles get their economic house in order, they will be that much less likely to turn for help to the Russians, who have already provided Poland with substantial economic assistance.

The evolution of Eastern Europe toward the capitalist West is a direct result of the mounting debt accumulated by the Communist-bloc countries in recent years. In the five years from 1974 through 1978, this debt rose from about $13 billion to about $55 billion. More than 60 percent of these credits were extended by commercial banks, which in comparison hold about 43 percent of the debt of the non-oil producing developing countries.

Cut Into Export Earnings

This unusual flow of capital 
occurred partly because of the 
Western recession, which cut heavily 
into East European export earnings 
needed to finance planned imports. 
The Cornmunist-bloc countries were also 
hard hit by the rising price of 
fuel and other raw materials, and a 
series of poor harvests in the 

As these problems multiplied, only the Soviet Union borrowed as heavily as Poland, the 10th-largest industrial country in the world. By the end of last year, Poland had built up long-term debt of $14.8 billion plus an estimated $2 billion more in short-term credits of less than one year.

West Germany and Britain are Poland's major creditors; the total United States exposure in the Communist nation is about 1.9 billion including about $1.24 billion in debt held by American banks, some $500 million in credits from the Commodity Credit Corporation for grain purchases, and about 175 million from the Export-Import Bank.

Most of the private loans were made from 1974 to 1976, the year in which Poland's current account deficit peaked at $3.2 billion. Both the current account and trade deficits have been decreasing, to $2 billion and $1.5 billion, respectively, last year.

Repayment a Heavy Burden

But repayment obligations on the debt incurred a few years ago are also at a peak and will continue to place a heavy burden on the nation for several more years.

This year bankers estimate that Poland will have to pay some $1 billion in interest alone not counting repayments of principal. Moreover, payments of roughly this level will continue for years.

The Poles, told in effect by the Western banks that they had to tighten their belts, responded with a fiscal program designed to put their trade back in rough balance by 1980. The 1979 budget, announced in December, called for a 10 percent reduction in investment and tight controls on imports. It is expected to cut economic growth in half this year.

Expenditures on consumer subsidies, on such items as food, health, and housing on the other hand will amount to fully 40 percent of the budget. The Polish Government led by Edward Gierek is is well aware that an austerity program in 1970 brought down the regime of his predecessor as Communist Party chief, Wladislaw Gomulka, and that a sharp increase in food prices in 1976 brought riots and the near collapse of his own Government.

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