APRIL 1981 - VOLUME 2 - NUMBER 4
POland: Will the Soviets Send in the IMF?
by Wendy Cooper
For many weeks, the question on everyone's lips has been: will the Soviet Union invade Poland? An additional question should now be posed: will the International Monetary Fund (IMF) intervene?
At the beginning of _April, Polish officials told their commercial bank creditors in Western Europe and the U.S. that Poland was read\ to begin discussions aimed at rejoining the IMF. a body Stalin had ordered Poland to leave in 1950. The recent news sent a ripple of relief through the international banking community.
Western bankers have good reason to be pleased by the prospects of Poland entering the IM F. Poland's total debt to Western creditors now amounts to U.S. $27 billion, including $12.7 billion owed to commercial banks in loans that are not protected by guarantees from Western government credit agencies. The imposition of IMF financial discipline would make the banks a lot more secure about lending because the typical Fund program--- freezing wages and limiting government spending--is de-, signed to strengthen the balance of payments position of countries that are in debt, thus placing such countries in a better position to service their debts.
Some 80 U.S. banks are involved in private loans that amount to roughly $1.7 billion. Their exposure is in the range of five to six percent of the banks' capital. Nine banks in the U.S. hold two-thirds of U.S. credits in Poland; Bank of America has loaned an estimated $250 million, and the four largest New York banks-Citibank, Chase, Manufacturer's Hanover, and Morgan Guarantee-about $200 million each.
Ever since the extent of Poland's financial crisis first became widely known last summer, the banks have been playing what Fortune magazine has called "a bizarre and unwelcome role as a combination alter ego and financial policeman" for the most troubled economy in the Eastern bloc -one which suffered a trade deficit of $800 million in 1980 and is desperately in need of food and raw materials.
But if the IMF's entry into the Polish drama is one of the clearest indications to date of economic interdependence between East and West, it is not a panacea for Poland's problems. The Western financial system of which the Fund is the linchpin is in poor shape to cover Poland's indebtedness. Already by late March, the Fund had all hut exhausted its resources; only a massive loan of $I I billion from Saudi Arabia prevented the Fund from taking the unprecedented step of borrowing from private capital markets. Even with the Saudi loan, the Fund may he short on capital, as loans to China, Jamaica, and perhaps to Brazil, will severely deplete its resources.
Nevertheless, in the immediate term. Polish membership in the IMF would provide Western creditors with a much better framework to monitor the country's foreign debt and influence its economic performance. It would also give the Poles an important new source of hard currency borrowings.
The Poles' overture to the Fund is likely to encourage the steering committee of 23 Western banks (which represents about 400 commercial creditors in total) to move faster on Poland's request to reschedule the $3.1 billion of its commercial bank debt that falls due this year. The Poles first requested refinancing discussions with commercial bankers at the end of February, but the banks have been holding back while the nation's political situation remains volatile.
Talks with the commercial banks have awaited progress being made in separate discussions with Western governments that have been asked to reschedule $4.4 billion in government-to-government debts maturing this year. Even if the governments do not complete a rescheduling agreement with the Poles this month, they are at least expected to provide short-term financial and other assistance. Early in April, the European Economic Community (EEC) gave Poland $680 million in food aid-sufficient to cover the country's needs for the second and perhaps third quarters of this year. The Poles are also likely to approach EEC member countries for bilateral credits to pay for additional food.
Western governments and commercial banks, as well as the Soviet Union, want to avoid a Polish default. The West, and West Germany in particular, has an important trading relationship with Poland and with the Eastern bloc generally, in addition to billions of dollars worth of loans outstanding.
The Soviet Union, for its part, places great value on continued access to Western credits and markets. It has it.., Own creditworthiness as well as it,,, satellites' at stake if Poland defaults.
In the past 15 years or so, the annual trade of the Soviet Union and its Eastern bloc allies with the Western industrial countries has grown 10-fold: from about S3.5 billion to more than $35 billion. In 1980. the Soviet Union and its allies made record net borrowing, in the West of S67 billion--about ,0 percent of them from commercial banks.
Poland's position, however, is crucial: it accounts for almost 32 percent of the Eastern bloc's total debt to the West. It the Soviets invade Poland, the entire house of cards could collapse. Western governments and commercial bankers would find it politically almost impossible to extend financial help to Poland, and they would be extremely reluctant to reschedule or issue new loans to other Soviet bloc nations. In those circumstances, Moscow would have to bankroll not only the Polish economy, but also the economies of other Eastern bloc countries heavily dependent on their trade ties to the West.
As long as Poland remains within the Eastern bloc, the Soviets will act as the ultimate guarantor of its loans. But by dropping their reservations about Poland's membership in the IMF, the Soviets apparently are ready to pass a large chunk of the burden over to the West.
The financial strain of supporting the crippled Polish economy is clearly one factor that must be weighing heavily on the Kremlin. But there may be other considerations.
The demands of the Polish workers, as expressed through Solidarity, have the potential to subvert Western banks as much as they do Soviet power: more than one banker expressed relief when the strikers' original demands last summer were "moderated." For if Solidarity's demands were met and wages rose while food prices froze, the Polish government would be even harder pressed to service its debt to its Western creditors.
By passing some of the burden for Poland on to the l M F, the Soviets may have found a means of exposing Western hypocrisy towards Poland's independent trade unions-and, possibly, a way of quashing Solidarity's aspirations without having to do it themselves.
Wendy Cooper reports for World Business Weekly on international trade and investment issues.