NOVEMBER/DECEMBER 1987 - VOLUME 8 - NUMBERS 11 & 12
E C O N O M I C S
Financing East-West Trade
by Samantha Sparks
While much of the world remains focused on the Third World's debt crisis, slack export earnings and a tightening of commercial credit flows have created major foreign debt problems for the Eastern European region. Total debt owed by the region, including the Soviet Union, stood at about $138 billion at the end of 1986.
To pull themselves out of debt and attract desperately needed Western capital, most countries in the region have begun to implement unprecedented reforms in trade and foreign investment laws, easing state control over production at a pace unthinkable only a few years ago.
Yet most analysts do not expect the impact of these farreaching efforts to be felt for another 5 to 10 years, leaving the region facing a bleak immediate future of slow trade and, in some cases, continued limited access to hard currency credits.
Many of the Eastern European countries are caught in an economic Catch-22: they badly need to buy Western equipment and technology in order to spur production and keep their industrial and manufactured exports competitive. But until they can increase their export earnings, they lack the convertible currency necessary to purchase enough imports.
In Poland, one of the worst cases, the 1978-82 debt crisis halved investment and reduced production by about 25 percent, according to World Bank estimates.
The debt picture varies widely across the region. While Yugoslavia, Hungary, Poland and Romania are not generally considered commercially creditworthy, the German Democratic Republic and Czechoslovakia have kept a tight rein on borrowing in the past, and could now win financing relatively easily if they wanted to, according to Jan Vanous, Director of PlanEcon, the Washington based firm specializing in East European economics.
By the end of 1986, Poland's debt was $33.5 billion according to PlanEcon. Yugoslavia, meanwhile, is estimated to owe about $20 billion to foreign creditors, about $14 billion of this amount falling due over the next five years. Neither Poland nor Yugoslavia have fully serviced their debts for several years, and Yugoslavia earlier this year declared a three-year moratorium on some commercial repayments.
East Germany owed $16.3 billion at the end of 1986, followed by Hungary with a $15.1 billion debt, then Romania at $6.4 billion, Bulgaria at $4.8 billion and Czechoslovakia with $4.1 billion in debt, according to PlanEcon.
The Soviet Union owed the West about $34.7 billion at the end of 1986, according to PlanEcon, more than any other country in Eastern Europe.
Much of the increase in debt in the past two years has been due to the declining value of the dollar relative to other currencies, not increased borrowings. Imports from the West skyrocketed between 1970 and 1980, from $5 billion at the start of the decade to $26 billion at the end. The spending spree was financed in large part by Western commercial bankers and governments - primarily in Europe, and to a much lesser degree in the United States.
Accumulation of interest payments was compounded for the region, as for the less developed countries, by sluggish world demand for its exports. Poland today would have to spend about 70 percent of export earnings to fully service its debt; with repeated reschedulings, about 29 percent of earnings go to pay the debt, according to World Bank figures. Yugoslavia's debt service payments are estimated to equal about 50 percent of its export earnings, according to Business Eastern Europe, a weekly newsletter.
The drop in the price of fuel, which accounted for nearly 60 percent of income from the West in 1986, has hit the region especially hard.
At the same time, Eastern Europe's traditional reliance on manufactured goods and agricultural raw materials for export earnings is increasingly threatened by the aggressive export efforts of heavily burdened Latin American debtors and the newly industrialized countries of Asia, analysts say.
According to PlanEcon, countries in the region have adopted essentially two different strategies to try to finance trade in the face of their debt burdens. The Soviet Union, Bulgaria, Czechoslovakia and East Germany have turned increasingly toward Western European commercial banks and export-credit agencies, and away from government loans.
Between 1980 and 1986, Moscow's share of borrowing from these banks leapt from 49.9 percent to 74 percent.
"Clearly, this development reflects the implementation of measures in the West to discourage official lending to the Soviet Union after 1982, and raise the cost of such credits to the point where they became more expensive than commercial credits," according to a recent report from PlanEcon.
On the other hand, Hungary, Poland, Romania and Yugoslavia, the four countries that are members of the World Bank and International Monetary Fund (IMF), have turned increasingly toward these multilateral institutions to satisfy their financial needs.
Reforms undertaken with World Bank support generally aim at reducing state control over production, investment and pricing policies and placing responsibility for decisions in these areas with independent enterprises that would operate more in line with free-market competitive principles.
World Bank and IMF credits represented about one tenth of Hungary's debt at the start of this decade; they now account for about one-third, according to PlanFcon's director, Jan Vanous. Poland's debt to government and multilateral creditors has more than doubled in the same period, as has Yugoslavia's, which used World Bank money to pay for broad structural economic reforms. In fiscal year 1987, Belgrade also borrowed $90 million from the World Bank to finance energy conservation projects.
Likewise, Hungary uses World Bank money for industrial rehabilitation, borrowing over $300 million in FY 87 to finance improvements in its telecommunications network and energy sectors.
Poland joined the Bank in 1986, but has not yet borrowed any money. Bank staff "have been carrying out some economic work trying to understand their economy," says a Bank spokesperson, and may lend in the near future. Since 1982, Warsaw has received no new external finance from the West except "tiny amounts of trade credit," according to the World Bank.
The Soviet Union has also expressed interest in joining the IMF and World Bank, but has been discouraged by the Reagan administration. Because its per capita income is too high for it to be eligible for World Bank lending, Moscow could not borrow from the institution. But analysts note that membership in the Bank would allow Soviet business to bid on the roughly $17 billion of Bank projects each year, a market estimated at $30 to $40 billion. Moreover, membership in the world's foremost multilateral financial institutions would enhance Moscow's standing in the international community, analysts say.
Borrowing from commercial banks also continues for some countries able to attract these credits - principally Czechoslovakia, Hungary, Yugoslavia and the Soviet Union.
Earlier this year, Hungary reached an accord with a consortium led by the Deutsche Bank of West Germany for a 1 billion DM loan, "used mainly to cover upcoming debt payments," according to Business Eastern Europe.
Debt-strapped Poland has also rescheduled some $8 billion (about 95 percent) of its debt payments falling due to commercial creditors between 1988 and 1993. Payments are now spread over a 15-year period. Meanwhile, Warsaw still confronts some $2 billion in arrears to Western governments.
Eastern Europe's continuing efforts to expand its economies and its reliance on Western creditors have not gone unnoticed by conservative forces in the
United States, who fear commercial bank loans to the region maybe used to strengthen the Soviet economy. Republican Rep. Jack Kemp of New York has introduced a bill in the U.S. House of Representatives that would give the President discretionary authority to ban all commercial bank lending to the region and would also make U.S. banks declare the terms and amounts of lending to the Eastern bloc, including Yugoslavia. Kemp spokesman Raul Fernandez said the bill is intended to keep tighter track of loans not tied to any specific project, which could be used for Moscow's benefit at U.S. taxpayers' expense.
Critics, however, point out that the measure would have little real impact, even if enacted. U.S. commercial lending to Eastern Europe is dwarfed by Western European commercial bank activity. Vanous estimates that combined U.S. commercial lending to the Soviet Union is equal to the amount of credit provided by "one Austrian bank."
A very significant trend, Vanous says, is Japanese bank lending to East Europe. Japanese bankers are vigorously filling the void created in the last few years, as Western banks have tightened their credit lines.
"Japan is the single most important source of new money" into the region, although it still trails West Germany in terms of overall exposure, Various says. It is not known exactly how much Japanese banks are lending, because unlike their Western counterparts, they are not required to divulge country loan exposures.
But he says Japanese banks have released, "a flood of money" into the East bloc over the last three years, with most of this financing going to Hungary, Bulgaria, Czechoslovakia and the Soviet Union.