FEBRUARY 1982 - VOLUME 3 - NUMBER 2
The Question Remains - Who Pays?
Western governments are calling the Soviets' bluff over Poland's $2 7 billion debtby Wendy Cooper
When the Polish tanks took over the streets of Warsaw and the military rounded up Solidarity's leaders in early December, few outsiders were more relieved with the outcome than Western bankers, who have outstanding loans of $16 billion to Poland.
Some of the commercial banks-particularly the West Germans-may face heavy losses if Poland defaults. From the banker's perspective, the existence of a free and vigorous trade union like Solidarity, able to shut down the economy virtually at will, meant that the Polish government would be unable to bring the economy around to the point where debts could be repaid, or even interest payments serviced.
It was not surprising, then, when several prominent individuals in the banking community made outspoken statements on the crackdown. "Who knows which political system works? ... The only test we care about is: can they pay their bills?", Thomas Theobold, senior executive vice president of Citibank's international division, told the Wall Street Journal. Theobold's comments were echoed by another banker who went unnamed in the same article: "most bankers think authoritarian governments are good because they impose discipline," he said. "Each time there is a coup d'etat in Latin America we are very happy because we know the credit demands will flow in."
Bankers' relief at the coup, however, may be tempered by the realization that the International Monetary Fund will find it more difficult to come to their rescue, as bankers once had hoped (MM, April, 1981). Poland's formal application for membership in the IMF, submitted on November 10, is likely to be held in limbo for some time while the Western allies continue to bicker over the forms of punishment to be meted out to the Soviet Union.
The crux of the Polish matter is this: who will ultimately pick up the bills? - the banks, Western governments or the Soviet Union?
With this question up in the air, commercial bankers are being extremely circumspect about their exposures.
The Polish debt rescheduling negotiations are the first ever in which the banks involved have refused to reveal even to each other how much each one has at stake.
The West German Dresdner Bank is the worldwide coordinator for 501 banks involved in Polish debt negotiations and is said to hold about 500 million of a total of $4.5 billion owed by Poland to German commercial banks. For rather obvious reasons, senior Dresdner executives have been scurrying between Frankfurt and Warsaw in recent days, issuing more or less regular assurances to the press that the Poles are beginning to cough up the interest payments on their debt.
Completion of an agreement to reschedule $2.4 billion of commercial credits due in the first three quarters of 1981 for seven years hinges on payment of about $500 million in overdue interest to Western banks. The Poles have told the Dresdner Bank officials that they have indeed paid out about $200 million of this total.
U.S. bankers, however, who hold $1.3 billion of Polish commercial bank debt, claim to have no independent verification of the interest payments. Morgan Guaranty Trust Co., for example, (which, according to estimates by Bache, Halsey, Stuart, Shields, Inc., holds between $75 and $100 million in loans to Poland that are not guaranteed by third parties) admits to having received some interest payments recently but says it has no way of knowing if they relate to the $200 million figure at issue.
According to press reports, some American bankers believe that the Poles have had the money all along but have been holding out in an attempt to get better repayment terms.
U.S. bank exposure is "well spread" over about 63 banks, Bache reports. But the U.S. banks with the biggest exposure in Poland have fallen sharply in stock market trading since the declaration of martial law intensified the crisis. Bank of America, for example, which is generally regarded as the U.S. bank with the largest Polish lending, saw its stock rating plummet more than 10% in the first half of December. Other big drops were posted by Citicorp, Chase, and Manufacturers Hanover (all owed between $75 and $100 million in unguaranteed debt according to Bache estimates), and by Chemical (owed $60-$80 million) and Bankers Trust (owed $25-$50 million).
The Polish government, of course, is far from eager to be declared bankrupt. Warsaw may be particularly anxious to ease the fears of some of its smaller creditors who, as carriers of a disproportionate debt burden, may panic and call loans into default, thereby setting off a chain reaction. Perhaps for this reason the Polish government has chosen Creditanstalt-Bankverein- an Austrian b an k that is insignificant in the lexicon of Polish creditors - to relay the Polish ' government's December promise of substantial debt payments.
With total East bloc debt to the West standing at $80 billion, the Soviets also cannot risk a default, since that would probably freeze up any chances for the Soviet Union or its financially-strapped satellites to receive future loans from the West.
It is this very vulnerability of the Soviets that has prompted the likes of the Wall Street Journal and Felix Rohatyn to recommend that the West call the Polish bluff and declare the country in default.
Rohatyn, senior partner with the investment house of Lazard-Freres, pointed out in a New York Times op-ed on January 11 that efforts to avoid a formal default were purely exercises in "theology": the Poles were already de facto in default. The West, argued Rohatyn, should not be the ones left to support the martial law government. "The Soviet Union exercises political and military control over Poland," Rohatyn wrote, "so the Soviet Union should take the burden of financing."
Originally pleased with martial law, bankers may now be less optimistic, as Western powers threaten to use the leverage of Poland's indebtedness for political purposes. For instance, at the January NATO meetings in Brussels, the West agreed to suspend renegotiations of the $10.5 billion Poland owes the NATO governments.
If any of the major Western governments decides to go a step further and use the Rohatyn weapon - calling a default on government loans to Poland, commercial bankers may be left holding an empty bag. 0