Financial Brinkmanship

By John Greenwald

Bankers pressure Poland to pay interest on its staggering debts

Some 500 Western banks and the Polish government last week were playing a multibillion-dollar game of financial chicken. On the one side, some American and European financiers contemplated seizing Polish bank accounts, ships or airliners if the Warsaw government fails to make a $500 million interest payment by the end of the year. If just one of the banks started to grab Polish assets, it could set off a dash for cash that would threaten the stability of international banking by calling down an avalanche of lawsuits, tightening credit around the world, and perhaps causing some financial failures. On the other side, the Polish foreign trade bank stalled for time, hoping to force the banks, which have already lent the Poles more than $14 billion, to put up another $350 million line of credit.

Representatives of eight of the European and American banks, acting on behalf of all the Western banks that have made loans to Poland, met last week at a Zurich hotel to discuss the latest Polish loan request. Earlier, six major U.S. banks decided in New York City to deny any additional money for the time being. But after eight hours of talks in Zurich, the bankers broke up, concluding that they had little choice but to let the Polish debt problem drag into the new year.

The dilemma of the bankers is clear. They are reluctant to loan any more funds to a country that a leading Wall Street analyst bluntly called "both an economic and a political basket case." Yet at the same time, the banks would lose billions of dollars if Poland is forced to renounce its debts. The main victims of a default caused by the banks would be the banks. Said one European financier: "If you pull the plug on Poland, you pull it on yourself."

The current troubles of the bankers are largely of their own making. Poland's foreign debt rose spectacularly throughout the 1970s, while the country's industrial growth rate slowed during the decade. As Poland's centrally planned economy began to sink into chaos, European and American bankers nonetheless continued to lend money to the Warsaw government, prompted in part by the desire of Western governments to maintain the spirit of detente.

Private banks, though, were not the only unwary financiers. The U.S. and 14 other governments have provided Poland with an additional $11 billion, raising the country's combined debt to an estimated $25.5 billion.

Analysts believe that U.S. banks have made about $1.8 billion worth of loans to Poland. Bank of America is" the biggest U.S. lender, with $175 million of debt outstanding. Other major creditors include five New York City banks: Citicorp, Chase Manhattan, Manufacturers Hanover, Morgan Guaranty and Chemical. Each has loans of more than $75 million with Poland.

Nonetheless, American banks are not Poland's leading creditors. That dubious distinction goes to West German financial institutions, which are owed at least $2.7 billion. The largest single lender is the Bank fuer Gemeinwirtschaft, with a total of about $310 million in Polish credits outstanding, followed by three other German banks with $180 million or more each. Hans Friderichs, Dresdner Bank's chairman, recently conceded that his bank was setting up a contingency fund against the possible write-off of part of its Polish and other weak loans.

Poland has been on the brink of defaulting on its loans for almost a year. During the summer and fall, private bankers and Polish authorities negotiated a program to give Warsaw more time to pay off its debts. In an agreement reached in November, the Western bankers said that they would give the Poles an additional seven years to repay $2.4 billion that was due this year.

One tough condition, though, was that the Poles, who had already paid more than $2 billion in interest this year, had to put up an additional $500 million in debt service charges before the end of the year. The Warsaw government scrambled to raise foreign exchange to make the interest payment, but by early December it was able to assemble only $150 million. Immediately after martial law was declared, Marian Minkiewicz, president of Bank Handlowy, the nation's foreign trade bank, sent wires to 23 major commercial creditors pleading for a short-term loan to keep Poland from toppling into technical default.

Poland's failure to pay off its loans could have repercussions on the complex structure of East-West finance. During the past decade, Western banks have lent freely to all Soviet bloc countries. Rumania, for example, has built up $9.4 billion in Western debt, while Hungary has outstanding loans of $7.2 billion. The total East European debt is estimated at about $80 billion.

Although Communist governments have traditionally been some of the best credit risks in banking, a Polish default would change views about all future East European loans. Warned a leading West German banker last week: "The Soviets must know the dangers of not financing the Poles. It will be cheaper for them in the long run to do it because if they don't support Poland now, they and the entire East bloc will have to pay a lot more for all their credit."

Western bankers maintain that both the East Europeans and the Soviets are dependent upon them for badly needed loans to finance projects like the new $15 billion Siberian natural gas pipeline. Thus, many European and American moneymen believe that the Soviets will eventually be forced to help pay off the Polish debt in order to keep their own lines of credit open in the West. Bankers have nicknamed this hypothesis of a Soviet financial bailout of Poland the "umbrella theory."

Soviet action in world financial markets last week, however, left Western financial analysts more puzzled than enlightened about the Soviets' future action. Moscow continued its recent major gold sales, even though they were forcing down the price. In the past three weeks the Soviets have sold an estimated 100 metric tons of gold for more than $1 billion. Rumors that the Soviets are seeking $350 million in loans circulated last week in European banking circles. The money would seemingly be used to help the Poles.

The official U.S. position in the Polish debt battle is to stay out of the private bankers' negotiations. The Government is particularly wary of being forced to grant loan guarantees to back the private-bank lending to Poland. The Administration is also trying to keep economic pressure on the Soviet Union in order to force it to commit some of its financial resources to Poland. Bankers and politicians expect that sooner or later the Soviet financial umbrella will be raised over Poland. But the real beneficiaries of such action will be the Western financial institutions that have been lending money loosely in Eastern Europe. --By John Greenwald. Reportedby Lawrence Malkin/Paris and Bruce van Voorst/ New York

With reporting by Lawrence Malkin/Paris, Bruce van Voorst/New York

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