EASTERN EUROPE'S CREDIT CRUNCH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00228R000100100004-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 19, 2016
• Document Release Date: February 13, 2007
• Sequence Number: 4
• Publication Date: March 1, 1982
• Content Type: REPORT

Intelligence
Eastern Europe's
Credit Crunch
C
HIE
o9 r W
00 ( ;
DIA, ;11,00. ON
Secret
EUR 82-10033
March 1982
Copy 317
Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
An Intelligence Assessment
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Directorate of Secret
Intelligence
Eastern Europe's
Credit Crunch
An Intelligence Assessment
Information available as of 23 February 1982
has been used in the preparation of this report.
The authors of this naner arel of the
Office of European Analysis. Comments and
queries are welcome and may be directed to the Chief,
East-West Regional Issues Branch Eastern Europe
Division, EURA
This report was coordinated with the National
Intelligence Officer for the USSR and Eastern
Europe and with the Office of Soviet Analysis
Secret
EUR 82-10033
March 1982
Aoorov .d For Release 2007/02/13 - (',IA-RDP83BOO 8R000100100004-
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Eastern Europe's
Credit Crunch II 25
Key Judgments Inability to obtain loans threatens a spreading financial crisis in Eastern
Europe. Bankers' concern over East European ' creditworthiness height-
ened in 1981 as Poland sought to negotiate debt relief and Romania fell be-
hind in meeting its payments obligations. Hungary, East Germany, and
Yugoslavia may have to join Poland and Romania in rescheduling their
debts by the end of the year. At best, the sharp import cuts forced by the
lack of access to credits will depress domestic growth and living standards
and have serious implications for political stability. Only Bulgaria and
Czechoslovakia, ironically rewarded for their policy of economic independ-
ence from the West, seem immune for the time being from the credit
crunch.
The East European countries have faced an increasingly chilly borrowing
climate for more than a year. The Polish and Romanian financial crises,
coupled with growing concern over Eastern Europe's economic problems in
general, have led bankers to reassess their assumptions about the area's
creditworthiness. Recent information suggests that their access to Western
credit continues to shrink. As matters now stand, no East European
borrower can obtain a syndicated Eurocurrency loan, and bankers are
refusing to roll over some credits as they come due. Even the export credit
agencies of Western governments, hard hit by the situation in Poland and
other problems, are wary of increasing loan guarantees.
Poland's 1981 private debt rescheduling agreement is in suspense, and
Warsaw has virtually no chance of generating a large trade surplus or
obtaining enough debt relief and credits to cover a 1982 debt service
burden of $10 billion. None of the possible outcomes to Poland's financial
mess is likely to improve the prospects for borrowing by other East
European countries. Although a Polish default alone would not lead to
serious debt servicing problems for the other countries, it would delay and
make more difficult their return to Western capital markets.
Romania's problems, like Poland's, have hurt Eastern Europe's ability to
borrow. Bucharest's effort to reschedule its debt with banks is off to a
smoother start, but several obstacles must be overcome to conclude an
agreement. Even with debt relief, Bucharest would face a large financial
gap. After sharp import cuts in 1981, there is less scope for adjustment
0
iii Secret
EUR 82-10033
March 1982
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
without damage to the already strained domestic economy. Reserves are
low and Romania is reluctant to draw from its gold stock perhaps because
some of it has been used as collateral for loans.
East Germany, Hungary, and Yugoslavia have multibillion-dollar borrow-
ing needs this year, and.they are virtually shut out of Western capital
markets. Banks have been reducing their medium- and long-term exposure
for the past year, and in recent weeks some West European banks have re-
duced their short-term lines of credit. Even if the cutbacks are modest,
East Germany, Hungary, and Yugoslavia will face serious problems in
1982, but they might be able to get through by recourse to government-
guaranteed loans, supplier financing, reserve drawdowns, and import cuts.
Eastern Europe's borrowing problems would increase if the bankers'
negative attitudes were reinforced by reductions in credits from Western
governments. Credits granted or guaranteed by Western governments have
been important supplements to commercial credits for most of the coun-
tries. More important, a curtailment of new Western government credits
and guarantees would accelerate the private cutbacks already under way
(including short-term credit lines). If this were to occur, several more East
European countries would find their debt servicing problems unmanagea-
ble, and they would have to seek rescheduling or risk default. Withholding
of IMF credits would add to the woes of members Romania and
Yugoslavia and prospective member Hungary.
One option for these East European countries would be refusal to pay their
debts until they were assured that Western governments would take steps
to restore normal credit relations. Over the longer term, however, Eastern
Europe-particularly Yugoslavia-would want to maintain its trade and
financial relations with the West and try to avoid greater dependence on
the USSR. Facing serious economic constraints of its own, Moscow could
not provide nearly enough to offset diminished credits or hard currency
imports. In fact, the USSR may be pursuing an opposite policy; it has
already cut back on deliveries of oil to all the East European countries ex-
cept Bulgaria and Poland.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Contents
Key Judgments
iii
Eastern Europe's Recent Borrowing Problems
1
Reasons for Changing Creditor Attitudes
2
Warsaw's Bad Example
2
The Umbrella Theory
2
Outlook for Covering 1982 Financial Gap
6
Romania-Rescheduling Begins
7
Continued Poor Prospects for the Rest of Eastern Europe
9
Alternative Borrowing Scenarios and Adjustment Options
9
German Democratic Republic
12
Bulgaria
18
Appendix
19
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
u
Eastern Europe's
Credit Crunch
0
Eastern Europe's Recent Borrowing Problems
The attitudes and policies of the 1970s that opened
the West's credit windows to Eastern Europe have
given way gradually to caution, skepticism, worry,
and, finally, a slowdown in lending. Bankers' reluc-
tance to extend new credits has grown over the past
two years. The most obvious indicator of East Europe-
an borrowing problems has been the sharp cutback in
syndicated Eurocurrency loans. Data compiled by
Euromoney show that after peaking at $6.9 billion in
1979, syndicated loans to Eastern Europe in 1981
totaled only $3.0 billion (see table 1). There have been
no major syndications since last spring, when Hunga-
ry and the GDR with some difficulty completed $400
million and $100 million Eurodollar loans, respective-
Syndicated Loans for
Eastern Europe, 1976-81
Total
1,120
1,696 4,
549
6,914
5,037
3,026
Poland
425
186
739
901
1,089
106
Romania
0
50
453
1,100
458
337
Yugoslavia
100
323 1,
415
2,291
1,972
1,371
East Germany
65
542
916
782
481
627
Hungary
150
350
600
1,047
550
573
Czechoslovakia
260
0
150
461
487
4
Bulgaria
120
245
276
332
0
8
bankers have been more bearish than the West Euro-
peans, who stand to lose more if credit cutoffs precipi-
tate insolvencies. European banks, moreover, receive
more pressure to lend to Eastern Europe from domes-
tic clients eager to export to the area and hope they
can maintain financial relations in the long run
despite the current problems. Recently, however, the
differences between US and West European banks
have narrowed. The Europeans, who at first argued
for softer terms in the Polish rescheduling, by last fall
were pressing the Poles at least as hard as were the
Americans. West European banks apparently are now
as cautious as US banks in increasin their East
European exposure. 25
Negative attitudes toward lending to Eastern Europe
have varied in degree among lenders. In general, US
2 The "a forfait" market trades in promissory notes with maturities
of three to five years that do not carry Western government
guarantees
The poor financial situations of Western export credit
agencies cast a further pall over Eastern Europe's
borrowing prospects. The possibility of a Polish de-
fault-coupled with the need to reschedule Romania's
official debt and mounting payment difficulties for
some LDC and Western corporate borrowers-threat-
ens to bankrupt some agencies. Reduced government
outlays already halted the increase in credit subsidies
last year; now the need to pump more cash into
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
reserves for bad loans has reduced the volume of
loanable funds. As a result, West European govern-
new lending to less creditworthy borrowers. Since
some credit agencies have raised the risk rating for all
of Eastern Europe, the flow of cheap, officially backed
loans may well be cut back even to those countries not
yet experiencing payment difficulties.
Reasons for Changing Creditor Attitudes
Eastern Europe's borrowing problems, now full blown,
emerged first as one result of the chill in East-West
relations following the Soviet invasion of Afghanistan.
After mid-1980, developments in Poland began to
dominate creditors' attitudes. To a large extent, the
new attitude reflects doubts about an individual
state's ability to use credits wisely, to sell exports in
highly competitive and depressed Western markets,
and to maintain appropriate domestic-investment and
standard-of-living policies. Governments and bankers
have lost confidence in their assumptions about lend-
ing to Eastern Europe.
Warsaw's Bad Example
Poland's bankruptcy shattered several assumptions
that had served to boost Western lending to Eastern
Europe in the 1970s. East European countries had
been able to point to largely unblemished payments
records, a consideration that offset the paucity of data
released to lenders. Western lenders believed that the
centralized management of the East European coun-
tries' finances was sufficient protection and that these
countries could impose controls quickly to balance
their external accounts. CEMA countries enjoyed the
image of financial conservatives who would not bor-
row unless they were sure they could repay. By late
1980, it was clear to many bankers that Poland's debt
had become unmanageable and that new loans were
sought mainly to service old ones. Subsequently, the
payments coming due exceeded the new loans coming
in and Warsaw was unable to meet its payments. In
March 1981 Warsaw declared a moratorium on debt
service, the first open admission by a CEMA bor-
rower that it could not meet its financial obligations.
The Umbrella Theory
Much of the lending of the 1970s was founded on
faith in "the umbrella theory," which holds that the
USSR is the unwritten guarantor of loans to CEMA
countries. The bankers reasoned that Moscow's desire
to protect its own credit rating and that of its allies
would lead the USSR to police CEMA borrowers and
bail out any that got into trouble. Although by the
late 1970s bankers relied less on faith in the umbrella
and more on their views of individual borrowers, they
still expected the USSR to come to Poland's financial
rescue. Indeed, large infusions of Soviet hard currency
early last year probably delayed Warsaw's insolvency,
but only by a month or two, and in the end Poland's
debt burden proved to be more than Moscow could or
would bear. The Soviets apparently have not given
Poland any hard currency since the first quarter of
1981, although rumors that the USSR is providing
money continue to crop up. While bankers unsuccess-
fully have urged Moscow to pay the money the Poles
owe them, Soviet officials privately and publicly have
stressed that the debts are Poland's responsibility.
The Soviets themselves are in a hard currency bind
because of large trade deficits and have also had
trouble borrowing recently. Moreover, Moscow does
not want to establish a precedent for paying future
Polish debt service or for bailing out other CEMA
members. Even if it were willing to, the USSR could
afford to cover no more than a fraction of Poland's
$10 billion debt service in 1982. More broadly, Mos-
cow cannot be expected to backstop much of CEMA's
$70 billion debt to the West (see figure 1).
Romania Follows Poland
The change in bankers' perceptions was reinforced
when Romania joined Poland in the ranks of the
insolvent in the summer of 1981. Beginning in the
spring, Bucharest began to have trouble borrowing the
funds it needed to pay debt service bills swollen by
heavy past borrowing and high current interest rates.
By summer, Romania began to fall far behind in its
a ments to Western suppliers and banks. Bucharest,
agreed in mid-January
with Western ban cs t at a rescheduling of 1982
obligations was necessary. With two of the seven East
European countries unable to meet their obligations,
lenders began to wonder who would be next.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Figure 1
Eastern Europe: Hard Currency Debt in 1980-81
80 81
? 0 World Bank/IMF
Private/Reservesa
Officially guaranteed
a Re serves are shown to
the left of the zero axis.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Eastern Europe's Own Economic Problems
Aside from the Polish and Romanian payments diffi-
culties, bankers have become increasingly concerned
about Eastern Europe's economic problems and pros-
pects. Their experiences with Poland and Romania
have caused them to take a closer look at other
countries in the region, and their examinations have
revealed some worrisome signs.
Until recently, bankers regarded the dependence of
these countries on the USSR as an advantage. Mos-
cow produced substantial exportable surpluses of oil,
natural gas, iron ore, and other raw materials, which
it sold to CEMA countries in large quantities for soft
currency at prices well below world levels. Soviet
supplies thus sheltered Eastern Europe from the price
explosions and shortages of the 1970s. Now the
outlook for Soviet economic stagnation and for slower
growth or cutbacks in deliveries of oil and other
crucial Soviet products darkens prospects for the
CEMA countries. Reduced Soviet supplies will force
the CEMA countries to increase hard currency
expenditures for Middle Eastern oil and Western
industrial inputs (see figure 2).
The bankers have been disappointed in the results of
programs to import capital goods from the West.
Loans provided throughout the 1970s were often for
industrial or raw material development projects that
were expected to spur economic growth and to gener-
ate exports to repay the loans.' Some of these projects
turned out well, but many of them were delayed or
never reached expected capacities. Slow and shoddy
construction, raw material shortages, management
problems, and inability of the labor force to operate
foreign equipment all became evident. The contribu-
tion of Western imports to growth in Eastern Europe
is difficult to estimate, but at a minimum the import
programs associated with detente have not kept
growth rates from declining in recent years
' The project-loan concept has been another casualty of the Polish
muddle. Bankers preferred lending to finance Eastern imports for
specific projects, rather than balance-of-payments credits, because
the projects were expected to generate export receipts to repay the
loans. Poland's project loans have been thrown into the reschedul-
ing hopper along with other loans, despite the continued solvency of
some projects.
Political Factors
The formation of Solidarity and its contest for politi-
cal power with the Polish regime have forced bankers
to give more weight to political risk factors in deci-
sions about lending to Eastern Europe. Increasingly
chilly East-West political relations have compounded
their caution about the region. Bankers felt they had
the green light with the onset of detente. They rapidly
increased lending to the East, often with Western
governments as partners through export loans or
guarantees. The political euphoria began to fade in
the mid-1970s, and the invasion of Afghanistan at the
end of 1979 led to a pause of several months in
syndicated credits for Eastern Europe. Throughout
1981, the Polish crisis and the possibility of a Soviet
invasion added to the economic factors slowing lend-
ing to the East. The December crackdown on Solidar-
ity and the resulting actual and proposed economic
sanctions have provided further reasons for caution.
Since the imposition of martial law, Poland's financial
situation has deteriorated even further. Warsaw has
been unable to complete the 1981 private reschedul-
ing accord. Western governments have suspended
talks on debt relief for 1982 and are less willing to
extend further credits, leaving Poland with virtually
no foreign help to cover its huge 1982 debt service bill.
The likely outcomes of Poland's financial crisis have
narrowed to a few possibilities. None of these will
involve either much further damage to Warsaw's
already shattered hard currency trade and financial
relations or rapid restoration of creditworthiness. The
prospects remain poor that Warsaw can overcome the
financial hurdles that prevent imports of raw materi-
als, spare parts, and semimanufactured goods in the
quantities necessary for economic recovery.
Default
Poland has been in technical default since 26 March
1981, when Warsaw declared a moratorium on most
of its debt service payments. So far, no creditor has
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Eastern Europe: GNP Growth Rates
Hungary
Czechoslovakia
Bulgaria
Eastern Europe
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
declared legal default, but the threat from both banks
and governments continues as the 1981 private re-
scheduling drags on and 1982 arrearages mount. Any
of the 501 banks to which Warsaw owes overdue
interest and principal payments could initiate legal
default proceedings. Also governments could take
action on several grounds:
? In some cases, Warsaw apparently has not paid the
10 percent of principal and interest due in 1981 that
was not covered by the official rescheduling
agreement.
? Arrears have already started to build up this year on
government-guaranteed credits.
? The imposition of martial law makes the regime
vulnerable to the "tank clause," which allows the
Western creditors to abrogate the 1981 rescheduling
agreement under exceptional circumstances
Legal default could lead to a scramble by private
creditors for Poland's assets in the West, the value of
which would offset only a tiny fraction of Poland's
hard currency debt. Foreign trade would be adversely
affected. The trade impact might be small because
trade already is down as a result of Poland's inability
to obtain credits, the need to use export receipts to pay
interest to banks rather than to buy imports, and
reduced economic activity in Poland. Warsaw would
have to take measures to protect Polish ships and their
cargoes from legal action but third-county deals
could be worked out.
Although Poland's desperate financial condition limits
the additional damage that default could inflict in the
short run, default probably would make Poland's
return to creditworthiness and access to credits a
longer and more difficult process. The opprobrium of
formal default probably would be more difficult to
overcome than the reaction to a rescheduling. More-
over, legal suits and claims could complicate Polish
financial and commercial relations for some time. For
these reasons, the regime has put a high priority on
allocating scarce hard currency for debt service in
order to avoid default.
The present situation can go on as long as the least
patient holder of Polish debt allows it. Creditors have
held off calling default through many months of
Polish arrearages, economic slump, political turmoil,
and now martial law. Many banks probably have
given up hope that their loans will ever be repaid, but
they have held on to avoid the huge writeoffs of loans
that would be necessary if Poland were thrown into
default. With increased pressure from bank auditors
and regulators to write off the loans, the banks are
finding it more difficult to carry Polish credits as
sound assets
The Poles failed to pay off all 1981 interest due to
private banks by 15 February as promised, and the
banks set a new deadline of 26 March. By late March,
the unpaid interest was down to less than $10 million.
The signing of the agreement to reschedule 1981
principal payments was tentatively set for 6 April, but
the banks will not sign unless all 1981 interest is paid.
As long as the impasse continues and creditors do not
initiate default, Warsaw will still be in a financial
straitjacket. Banks will be unwilling to increase their
exposure, even by extending short-term credits. The
banker demands forced Warsaw to place an extremely
high priority on paying its 1981 interest obligations.
With Poland's reserves depleted and export revenues
apparently only a trickle, little is left for imports
If Warsaw does manage to sign the debt relief
agreement for last year, it will have cleared only its
most immediate financial hurdle. The conclusion of
the 1981 rescheduling agreement will be a plus for the
regime-possibly the first major economic agreement
with the West since martial law. The Poles hope-
probably unrealistically-that straightening out their
1981 obligations will encourage banks to restore
short-term credit lines, making possible some expan-
sion of trade.
Outlook for Covering 1982 Financial Gap
As soon as the 1981 private debt relief agreement is
completed, Poland will have to tackle the massive
burden of some $10 billion in payments due in 1982:
$5 billion in principal payments to Western govern-
ments and banks, another $1.8 billion to non-Western
creditors, and $3.3 billion in interest. The outlook for
covering the financial gap is even worse than last
year. With debt relief not arranged, arrearages mount
at the rate of $800 million monthly, intensifying the
risk of default (see table 2).
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Eastern Europe: Estimated
Financing Requirements
Total
Current account deficit
Repayments of
medium- and long-term
debt
Government-backed
Private
Repayments of short-
term debt
1981
1982
1981
1982 1981
9,140
10,300
4,085
4,565 5,430
1,340
2,600
800
450 1,400
6,400
6,800
1,300
1,900 2,200
2,600
3,500
300
550 400
3,800
3,300
1,000
1,350 1,800
1,900
900
2,124
2,040 bl,400
a Values in parentheses are current account surpluses.
b Includes 51 .2 hill 'on in arrearaaes on navments dne in 19R1
Secret
1982
1981
1982
1981
1982
1981 1982
1981
1982
4,900
6,400
7,200
3,680
3,300
1,950 1,940
910
770
1,200
1,900
1,500
580
420
150 (70) a
(560) a
(470)
2,300
2,400
3,200
800
880
550 560
760
740
400
400
500
110
125
190 200
110
100
1,900
2,000
2,700
690
755
360 360
650
640
1,400
2,500
2,500
2,700
2,000
1,600 1,450
640
500
Warsaw informed Western banks in late January that
it would pay no principal or interest due in 1982 at
least until the 1981 debt agreement is signed. The
banks replied that once the agreement is signed, they
want payment of interest due in 1982 through the
date of signature before the agreement on 1981 debt
can take effect. Even if this hurdle is passed, prospects
are poor for early conclusion of debt relief agreements
on 1982 obligations. Talks on 1982 government debt
were suspended indefinitely after the imposition of
martial law. Although banks have indicated that they
will begin 1982 discussions as soon as the 1981
rescheduling agreement is signed, they are likely to
demand stricter terms for this year's rescheduling.
Tough talk aside, the creditors have little leverage
over the Poles except the threat of default. Since
Warsaw will be unable to pay much of its 1982
obligations, it probably will choose to pay those
creditors who seem most likely to declare default or
most likely to extend new credits. In practice, this
means that Poland will attach the highest priority to
paying interest due-about $2.5 billion-to private
banks. Last year, the Poles took advantage of com-
modity credits extended by Western governments to
service bank obligations. Instead of using these credits
to increase total imports, Warsaw opted for nearly
balanced trade and diversions of funds to pay interest.
The Poles' recent announcement that they plan a
$530 million surplus for the first half of this year
indicates that Warsaw has chosen to pay at least some
debt service even at the expense of desperately needed
imports.
As long as nearly all new Western government credits
are blocked by sanctions, the trade account must bear
the burden of debt service. It is unlikely that Warsaw
could hold imports low enough to permit payment of
all interest obligations, to say nothing of installments
on principal.
Romania was the second CEMA member to encoun-
ter serious payments difficulties. Its critical financial
situation has forced Bucharest to seek debt relief, a
painful and embarrassing step that President
Ceausescu accepted only with great reluctance.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
The Romanians enter the rescheduling process with
some advantages in comparison to Poland. The politi-
cal situation is more stable in Romania, and Bucha-
rest's debt and financing requirements are less than
half as large as Warsaw's. Unlike Poland, Romania
has an outside chance of turning its financial position
around if it can gain a year or two of breathing space
through debt relief.
On the other hand, some factors will make the
negotiations difficult:
? The Romanians are disorganized and will attempt
to downplay their problem in an effort to avoid
comparisons with Poland.
? The bankers have little confidence in Bucharest's
financial acumen or its ability to manage its
economy.
? The Ceausescu regime's prospects for new aid from
Western governments or the USSR are not very
good; Romania has always been considered the
CEMA country least likely to find shelter under a
Soviet financial umbrella.
The IMF will be important to Romania's financial
future. Bucharest will need to resume drawings of its
standby credit, and it will need advice from the Fund
during the rescheduling negotiations with private
banks. The Ceausescu regime, however, will have to
be more willing than in the past to accept and
implement IMF guidance. The IMF's active role in
the past year has not prevented Romania's slide into
insolvency.
After accumulating $1.2 billion in arrearages by the
end of 1981, Bucharest began rescheduling talks in
January with several major Western banks. In the
third week of February, the Romanians accepted
rescheduling terms offered by two Western bap kern
who negotiated on behalf of nine major banks.
It took the Romanians only six weeks to come to
terms-a process that took nine months with Poland.
One major reason for the difference is that in the
Romanian case only nine major banks were represent-
ed in the rescheduling talks. Romania's remaining
303 creditor banks were notified after the terms were
negotiated. There are strong indications that some of
the banks object to the ratifica-
tion is far from assured
Thus, even after rescheduling private debt obligations,
Romania could face a gap of up to $2 billion.
Bucharest has little capability to cover this gap
through the trade account. Prospects for increasing
exports are bleak, and it cut imports so sharply in
1981 that industrial production already is suffering
from shortages of industrial materials and equipment.
The Romanians will be hard pressed to generate even
the $550 million trade surplus implied in official 1982
plans.
Romania's best chance for closing the gap would seem
to be through a drawdown of reserves. Bucharest
claims gold reserves of $1.4 billion but has been
reluctant to sell from this stock, possibly b
some has been used as collateral for loans.
25X
25
25
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Continued Poor Prospects for the Rest
of Eastern Europe
Throughout 1981, bankers told would-be East Euro-
pean borrowers that new loans to Eastern Europe
would have to await conclusion of the Polish resched-
uling agreement. With the signing ostensibly near at
hand, however, it appears that no matter how the
Polish financial situation evolves-and the Romanian
situation too-all East European countries will con-
tinue to face a poor borrowing climate.)
Warsaw's inability to meet its huge debt service bill,
combined with creditors' insistence that the interest
obligations be honored, assures that bankers will be
enmeshed in difficult negotiations this year and be-
yond. At least in 1982, and probably for years ahead,
Warsaw will be hard pressed to pay the interest that
bankers have insisted is necessary for conclusion of
rescheduling agreements. Hence, the risk of Polish
default will continue and perhaps increase.
The lending climate could worsen further if there is a
default by either Poland or Romania or a further
deterioration in the political and economic situation in
Poland. The major impact of default would derive
from subjective factors. Default would deal a blow to
bankers' faith that debt problems anywhere-and
particularly in Communist countries-can be worked
out in an orderly fashion. The result probably would
be a contraction in international lending to less
creditworthy borrowers everywhere and an erosion of
the already negative attitudes toward credits to East-
ern Europe. Subjective factors are critical since, in a
narrow financial sense, a Polish default would not
necessarily have much direct impact on the lending
ability of private banks. The key factor would be
banks' decisions on the allocation of lending among
competing borrowers.)
The type of default could make a big difference. If a
small creditor declares default, while other creditors
delay or refrain from following suit, the damage
would be minimized. If, on the other hand, the
leadership of the private bank group (the Multination-
al Task Force, representing 501 Western banks) de-
clared Poland in default, all creditors probably would
have to write off the Polish debt. The Romanian
rescheduling effort might fail and the rest of Eastern
Europe's access to credits would be even further
damaged.)
Independent of the strictly financial factors, economic
and political developments in Poland will play a big
role in determining Eastern Europe's near-term access
to private Western credits. Western creditors will be
looking for signs of economic turnaround and political
stability in Poland. If the Polish crisis eases some-
what-if martial law is lifted succcessfully, for exam-
ple-then pressure for sanctions would ease, and
private creditors would consider opening their lending
windows to the East. Even if the Polish domestic
situation does not change much, the Western reaction
to martial law could lose momentum. The creditors
probably will remain cautious for some time, however,
given that past signs of improvement in Poland have
proved fleeting and that the situation remains inher-
ently unstable. Thus, any return to large-scale private
lending to Eastern Europe probably will be at best a
slow process.
In any case, private lenders will be sensitive to signals
from their governments. If Western governments cut
back on credits and guarantees, this would have a
powerful impact on private lending and would make it
impossible for some of the East European countries to
cover their borrowing requirements.
Alternative Borrowing Scenarios and Adjustment
Options
Explanation of Scenarios
The following section assesses the likely impact of
tightening credit availability on the trade and pay-
ments situations of East Germany, Hungary, Czecho-
slovakia, Yugoslavia, and Bulgaria. Each country's
1982 financing requirement is determined by sum-
ming projected current account balances, estimated
repayments of medium- and long-term credits, and
short-term debt outstanding at yearend 1981.1
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Eastern Europe: Alternative Borrowing Scenarios for 1982
Rollovers of medium- and long-term 2,300
credits
Rollovers of medium- and long-term 3,200
credits
Rollovers of medium- and long-term 880
credits
a Values in parentheses indicate that available borrowing sources
exceed financing requirements.
In the baseline case, the East Europeans draw officially backed
credits at the 1981 level and can borrow sufficient private credits to
cover all maturing medium- and long-term obligations, both private
and government-backed. The East Europeans also are able to roll
over all short-term debt. These assumptions imply an increase in
private lender exposure to Eastern Europe.
In Variant 1, the East Europeans are able to roll over only 75
percent of maturing medium- and long-term obligations due to
cutbacks in private lending. They can continue to draw official
credits at the 1981 level and are able to roll over all short-term
debt.
Variant 2 tightens credit availability further by reducing short-
term exposure by 25 percent in addition to the cutback in medium-
and long-term lending of Variant 1.
These financing requirements were constructed under
the assumption that Euromarket interest rates would
average 10 percent in 1982.^ An alternate-and per-
haps more likely-assumption that interest rates will
average 13 percent would cause current account
The interest rates used in the projections is a weighted average of
the 90-day Euromarket deposit rates for the dollar, West German
mark, Swiss franc-the principal currencies in which the East
Europeans borrow.
balances to deteriorate by $400 million for the GDR,
$200 million for Hungary, $300 million for Romania,
and $800 million for Yugoslavia (see table 3).I
We estimate the borrowing capacity for each country
according to the baseline assumptions and then under
three variants of increasingly difficult borrowing con-
ditions. For the baseline case, we assume that banks
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Table 3 (continued)
Rollovers of short-term credits
2,000
2,000
1,500
1,000
New official credits
110
110
110
0
Financing gap
310
530
1,030
1,860
Czechoslovakia
Financing requirement
1,940
1,940
1,940
1,940
Borrowing sources
2,275
2,135
1,785
1,005
Rollovers of medium- and long-term
credits
560
420
420
280
Rollovers of short-term credits
1,450
1,450
1,100
725
New official credits
265
265
265
0
Financing gap
(335)a
(195?
155
935
Bulgaria
Financing requirement
770
770
770
770
Borrowing sources
1,380
1,190
1,065
620
Rollovers of medium- and long-term
credits
740
550
550
370
Rollovers of short-term credits
500
500
375
250
New official credits
140
140
140
0
Financing gap
(610?
(420)a
(295)a
150
Variant 3 presumes severe Western government actions to restrict
lending to Eastern Europe. The East Europeans can no longer make
any drawings on official and officially backed credits, including on
outstanding commitments. These actions are also assumed to lead
to further 25-percent reductions in private lending to Eastern
Europe.
roll over all maturing medium- and long-term obliga-
tions as well as short-term debt and that new officially
backed credits are drawn at the estimated 1981 rate.
In assuming no serious deterioration in borrowing
ability compared with last year, this baseline projec-
tion almost certainly is overly optimistic about East
European borrowing prospects. Several variants to
this baseline are therefore considered in order to
assess the impact of cuts in lendin in 1982 on the size
of each country's financial gap.
The first two variants to the baseline assess the
financing shortfall resulting from reductions in the
availability of commercial credit. The first variant
assumes that the East Europeans are able to roll over
only 75 percent of their maturing medium- and long-
term credits while maintaining short-term debt at the
1981 level. In the second variant, commercial banks
are assumed to take the additional step of cutting
short-term credit lines to 75 percent of the yearend
1981 level.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
These first two variants probably reflect more accu-
rately the present situation in which commercial
lenders are reluctant to extend new medium- and
long-term credits and, in some cases, are cutting
short-term lines of credit. In the third variant, we
assume that Western governments decide to reduce
lending to Eastern Europe by halting all government
credits and loan guarantees. Although the direct,
incremental impact of such a cutback is comparative-
ly small, such concerted action would accelerate
private credit cutbacks considerably beyond the 25-
percent overall reduction already assumed. Thus, the
third variant reduces rollovers of private debt to 50
percent of baseline borrowing capacity.
Finally, the analysis considers the gap between fi-
nancing requirements and borrowing capacities under
the baseline case and the variants (see figure 3). The
discussion focuses on (a) Eastern Europe's options for
offsetting reduced Western credits through reserve
drawdowns and adjustments in trade (and domestic
economic growth) and (b) the likelihood that the
adjustments required would be so great that individ-
ual countries would choose to reschedule or renege on
their debts (see table 4).
German Democratic Republic
East Germany has continued to follow a policy of
rapid growth despite a large and rising external debt.
In 1981 East Germany needed to finance a hard
currency current account deficit amounting to $1.9
billion and to refinance $4.9 billion in credits falling
due. Rollovers of old debt and new official credits
provided $5.7 billion, and the rest of its $6.8 billion
gross financing requirement was met by raising $700
million in new private credits and drawing $400
million out of hard currency reserves. By the end of
the year, net hard currency debt had risen to $12.8
billion, second-largest in CEMA, and the debt service
ratio had risen to an alarming 69 percent (see appen-
dix).
Baseline. The trade deficit is expected to narrow
somewhat this year, so that with interest obligations
of some $1.3 billion, the current account deficit is
projected to fall to $1.5 billion. Principal repayments
on medium- and long-term debt will be $800 million
higher than last year and, together with the need to
roll over short-term credit lines, will increase the gross
financing requirement to $7.2 billion-$800 million
more than East Berlin was able to round up last year.
If we assume that the GDR can secure the same
amount of new government-backed credits, including
the swing credit from the FRG, as it drew last year-
$800 million-and can roll over all its credits falling
due, it will still have a financial gap of $700 million.
1 7
If this cannot be covered through additional supplier
credits, East Berlin might be able to absorb import
cuts of 5 percent in real terms and take a reserve
drawdown of perhaps $500 million without any seri-
ous repercussions. East Germany has a reasonably
comfortable cushion of reserves-nearly $1.8 billion
at the end of 1981, equal to about three months of
projected 1982 hard currency imports.
East Germany's ability to sustain the precarious
balance we have described depends critically on favor-
able perceptions by the Western financial community.
For both 1981 and 1982, the total financing require-
ment, including the rollover of short-term credits,
exceeds export earnings by at least $1 billion. Meeting
import needs becomes very difficult for the East
Germans if they are unable to refinance all credits
falling due. The East Germans have been unable to
arrange new credits so far in 1982 even with West
German banks. They are desperately casting about
for very small credit lines (less than $1 million) in an
effort to finance current import needs. Deterioration
in the East Germans' external position, exacerbated
by reductions in deliveries of Polish coal and Soviet
oil, has already forced planners to reduce fuel alloca-
tions substantially. Such cuts make fulfillment of
economic growth targets unlikely. They do, however,
indicate an East German willingness to impose do-
mestic austerity in order to balance the external
account. In addition to energy conservation measures,
East Berlin has imposed extremely tight import re-
strictions on enterprises and has redoubled efforts to
manufacture hi h-quality products specifically for the
export market.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
Figure 3
Eastern Europe: Financing Requirements in 1982
Billion US $
Variant 1. If the GDR lost an additional $800 million
in financing as shown in the first variant, it could
draw down reserves by another $200 million to two
months of import cover. GDR planners, however,
would have to make further, more painful import cuts,
approaching 15 percent in real terms. Because fuels
and raw materials account for the majority of hard
currency imports and since the GDR in any case will
suffer cutbacks in deliveries of Soviet oil and contin-
ued slow deliveries of Polish coal, very little latitude
for such large cuts exists. East German planners
would have to sacrifice industrial growth rates or
markedly reduce personal consumption. Historically,
the GDR has profited handsomely from its special
relationship with West Germany. Undoubtedly the
West Germans could arrange to sustain East German
imports at any reasonable level, but the extent of
FRG largess is a major imponderable.
Variant 2. If the financial gap widens by a further
$625 million as in variant 2, the East Germans would
have to make deep cuts in their imports. The GDR
 rp oved For Release 2007/U
1 molt; -t
A
Rollover of all maturing private Rollover of only 75 percent of Rollover of only 75 percent of all No new official credit extensions,
obligations and new official maturing private medium- and maturing private obligations, in- and rollover of only 50 percent of all
credits equal to 1981 level. long-term obligations; rollover cluding short-term. New official maturing private obligations in
of all short-term debt. New offi- credits equal to 1981. 1982.
cial credits equal to 1981.
East Germany All but $700 million of $7.2 Even with additional reserve Debt rescheduling might be pre- Multilateral rescheduling unavoid-
billion financing requirement is drawdowns, required import ferred to required sharp cuts in able (if FRG goes along with cutoff
covered. Remaining gap can be cuts will hurt domestic growth imports. of new official credits).
covered by supplier credits, im- and consumption levels.
port cuts, and reserve draw-
downs.
Most of $3.3 billion financing Small reserve drawdown, import Necessary import cuts would Rescheduling avoidable only by
requirement is covered. Re- cuts, and possible IMF support hurt growth; IMF credits would maximum use of IMF credits.
maining gap can be filled by could cover financial gap. be critical.
supplier credits and possible
IMF support.
Yugoslavia All but $800 million of $4.9 Additional aid from OPEC, Sharp imports cuts needed with Could be forced to reschedule.
billion financing requirement is IMF, World Bank probably negative impact on growth and
covered. OPEC credits and re- sought. consumption.
serve drawdowns could cover
the shortfall.
Czechoslovakia Credit availability exceeds $1.9 Credit availability exceeds fi- All but $155 million of financ- Financing gap of $935 million can
billion financing requirement; nancing requirement. ing requirement can be covered. be covered by reserve drawdowns
reduction in debt occurs. Reserve drawdowns can cover and sharp cuts in imports.
gap.
Eastern Europe: Adjustment Options to Credit Cutbacks in 1982
Credit availability exceeds $770 Credit availability exceeds fi- Credit availability exceeds fi- Financing shortfall of $150 million
million financing requirement nancing requirement by $420 nancing requirement by $295 could be covered by import cuts and
by $610 million; continued re- million. million. possible Soviet support.
ductions in debt.
25X1
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
already has been holding down imports from the West
for several years, and there is little latitude for further
cuts without immediate damage to economic growth.
Variant 3. Unless West Germany were willing to
provide much additional support, East Germany
might opt for debt rescheduling in lieu of further
retrenchment on imports. Longstanding ties to East
Germany make it extremely difficult for Bonn, which
provides the bulk of East Germany's official support,
to impose government sanctions against East Berlin.
The FRG has recently renewed through mid-1982 the
interest-free swing credit at a level of 850 million
deutsche marks ($350 million). Notwithstanding the
magnitude of official credits-$800 million in 1981-
the major impact of official sanctions would be their
indirect influence on the banking community, which
would quickly rein in East German credit lines even
more. If the West refused to reschedule, East Ger-
many would be forced to default.
A first step in reacting to overt Western sanctions
would be to slash imports of food, especially grain. A
policy of allowing consumption levels to rise well
beyond what the small agricultural sector can produce
has made the country dependent on imports of West-
ern food, which cost the GDR over $1 billion in 1980.
Even with a slash in food imports, however, the East
Germans could hardly trim imports enough to make
up a credit shortfall as great as the $4 billion implied
by this scenario. They would almost certainly seek
rescheduling.
Hungary
After posting improved trade and payments perform-
ances in 1979-80, Hungary saw its current account
deficit widen last year. Weak demand in recession-
plagued Western Europe slowed export growth, while
higher Euromarket interest rates raised debt service
costs. The reluctance of Western lenders to extend
new credits to Eastern Europe scuttled Budapest's
efforts to raise a major Eurodollar syndication in the
latter half of the year. The Hungarians had to cover
their cash needs through a drawdown of reserves,
continued heavy short-term borrowing, and medium-
term bank-to-bank loans carrying shorter maturities
and higher interest charges than Budapest had pre-
viously received.
Recent weeks have produced an accelerating erosion
of Hungary's standing with Western banks, although
central bank intervention apparently has eased cut-
backs in short-term credit lines by West European
banks. Budapest remains locked out of the syndicated
market, and medium-term bank-to-bank loans have
dried up. The tightening financial squeeze has pro-
voked mounting concern in Budapest, which is anx-
iously seeking major new credits to meet its cash
needs and to shore up its falling foreign exchange
reserves.
Baseline. While the increase in Hungary's current
account deficit last year raised banker concern, the
damage to Budapest's credit rating stems mainly from
the reluctance of Western lenders to do business with
Eastern Europe. On its own merits, Budapest's basic
financial position is not hopeless. Although the Hun-
garians are reportedly counting on no more than 2- to
3-percent growth in hard currency exports in 1982,
they should be able to maintain a trade surplus and
possibly reduce the current account deficit. With a
debt service ratio of 37 percent, Hungary's debt
burden would seem manageable.
Even a slight easing of present banker concern over
lending to Eastern Europe could extricate the Hun-
garians from their predicament. If Budapest can roll
over its $880 million of medium- and long-term debt
maturing in 1982, maintain short-term credit at last
year's level, and obtain the same amount of govern-
ment credits as last year, its uncovered financial gap
would amount to only $310 million. This could be
covered through greater use of private supplier credit.
The Hungarians already dabbled in "creative" import
financing late last year when they picked up $130
million to pay for chemical purchases through a
syndication of banker acceptances. If Hungary joins
the International Monetary Fund, which it could do
as early as April, Budapest could raise some $400
million in low-conditionality IMF loans.
Variant 1. If Western banks refinance only 75 percent
of maturing medium- and long-term credits, this
would complicate Hungary's position only slightly as
long as short-term funds remained available. Buda-
pest could probably find the additional $220 million
by drawing reserves down $100 million and holding
imports at about the 1981 level.
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Variant 2. Budapest's present financial options would
likely be foreclosed only by a permanent and wide-
spread cutback in short-term credits, which could
balloon Hun a 's 1982 cash shortfall to more than
$1 billion
The Hungarians' ace in the hole before having to
reschedule could be their impending admission to the
IMF and World Bank. Maximum access to Fund
credit could provide as much as $2.5 billion over the
next three years in balance-of-payments financing.
Since Budapest has already demonstrated a readiness
to slow the growth of consumption and investment to
maintain external balance, it presumably would have
little problem in meeting IMF borrowing conditions.
Furthermore, access to World Bank loans could pro-
vide fallback development financing over the longer
term if Western bank loans remained slow.
Variant 3. Since Budapest makes little use of supplier
credits, a cutoff of official guarantees, per se, would
not seriously disrupt its trade. Of course, this action
would probably precipitate the sizable cutback in
commercial lending that would force Budapest to fall
back on the IMF. If that escape route were closed, the
Hungarians would likely be forced into rescheduling
their debt.
Adjustment Options. The Hungarians have little lee-
way to offset a Western financial cutback through
internal adjustment or greater reliance on CEMA.
Planners have already slowed economic growth to
1 percent or less and halted improvements in living
standards since 1978 in order to achieve external
balance. Present 1982 plans call for holding the
growth of national income to 1.0 to 1.5 percent and
the increase in total consumption to 0.5 to 1.0 percent
in order to hold down imports and free up goods for
export. Total exports are targeted to increase by
6 percent, while imports are to grow by 2 to 3 percent.
Although Budapest is planning a sizable increase in
deliveries to other CEMA members, these exports will
mainly cover higher prices for Soviet energy and raw
materials. Clearly the USSR will not replace the fuels
and raw materials Budapest now purchases in the
West-more than half of Hungary's hard currency
imports. Indeed, domestic shortfalls are forcing the
Soviets to limit and, in the case of oil, reduce the
volume of deliveries to Hungary.
Yugoslavia
Belgrade reduced its hard currency current account
deficit from a record $3.3 billion in 1979 to $1.4
billion in 1981. The trade deficit remained dangerous-
ly high, however, at $5.2 billion in 1981, because
Belgrade failed to raise its hard currency exports.
While exports worldwide registered a 5-percent in-
crease in real terms, exports to the convertible area
declined 3 percent. The strong performance of invisi-
bles (tourist receipts and remittances from Yugoslav
guestworkers abroad) was the key positive factor in
Yugoslavia's balance of payments in both 1980 and
1981. At the end of 1981, official reserves stood at a
comfortable $1.8 billion, enough to cover two months
of hard currency imports.
Baseline. We project that Yugoslavia's current ac-
count deficit will exceed $1.2 billion in 1982, $700
million more than the official Yugoslav projection.
Adding medium- and long-term principal repayments
of $2.3 billion and short-term debt of $1.4 billion
raises the financing requirement to $4.9 billion.
Belgrade can probably secure $1.7 billion in trade
credits, $700 million from a second tranche on a
three-year IMF loan, and close to $1 billion in
financial credits from European and OPEC sources.
The remaining $1.5 billion gap would have to be
closed through either (a) barter deals for OPEC oil, (b)
import cuts, or (c) reserve drawdowns. Import cuts
would further restrict GNP growth, which, in 1980-
1981, had already slowed to half the 6-percent aver-
age rate of the 1970s. The scope for further import
cutbacks is limited since Belgrade has drastically cut
imports in the last two years and inventories of
imported goods have been depleted.
Increased dependence on the Soviet Union is an
option but not a particularly desirable one for Yugo-
slavia. In 1981 the Soviet Union already accounted
for one-fourth of total Yugoslav trade; Moscow pro-
vided 90,000 barrels per day of crude oil-roughly 40
25
25X
25X'
25
25
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
Secret
percent of total Yugoslav crude oil imports-at mar-
ket prices. Yugoslav leaders have openly expressed
fear that increased dependence on the Soviets would
enable Moscow to use economic pressures to alter
Belgrade's political decisions. Having broken with the
Soviet Bloc in 1948, Yugoslav leaders are firm in their
desire to maintain Belgrade's nonaligned status in
both international relations and the domestic econom-
ic arena. Moreover, the more accustomed Yugoslav
export industries become to the lower standards de-
manded by CEMA markets, the more thwarted will
be government attempts to increase exports to hard
currency markets.
Variants I and 2. Yugoslavia would probably try to
cover the additional $575 million gap in Variant 1
through greater reliance on borrowing from interna-
tional institutions and OPEC sources. The IMF and
World Bank could provide an additional several hun-
dred million dollars. Belgrade, however, would have to
meet tougher conditionality for larger IMF loans, and
this might prove difficult given the problems encoun-
tered in negotiating policy measures for the current
loan agreement. In addition, the OPEC nations-with
which Belgrade has cultivated a special relationship
through its prominent role in the Nonaligned Move-
ment-mi ht be willin to provide more credit to
Belgrade.
If the Yugoslavs were unable to raise sufficient
additional credits, they would have to look to cutbacks
in imports-of as much as 5 percent from the 1981
level-to reduce their financing needs. Such import
reductions would prove quite painful, pushing the
GNP growth rate to 1 percent or less. Nonetheless,
this course of action would seem the only option
available under Variant 2 where reductions in short-
term lending push Yugoslavia's gap to more than $1.7
billion.
Variant 3. Since Yugoslavia is not a CEMA member
and the West has sought to preserve its nonaligned
and independent status, credit sanctions presumably
would not be applied to Belgrade. However, if Yugo-
slavia did suffer from a spillover effect from sanctions
that increased its financial gap to $3 billion, it would
be in serious financial trouble. Belgrade would prob-
ably request rescheduling rather than risk the possible
political consequences of the drastically reduced living
standards and increased unemployment that would
result from cuts in real imports of 10 percent or more.
Czechoslovakia
Czechoslovakia's current account deficit fell by
roughly $250 million in 1981 to $150 million, largely
on the strength of improved trade performance. The
deepening chill in East-West financial relations left
Czechoslovakia largely unscathed because Prague has
typically avoided major Eurodollar loans and relied
principally on short- and medium-term supplier cred-
its to cover its borrowing needs. Indeed, private and
officially guaranteed supplier credits apparently were
more than adequate to meet financing requirements
last year, as Prague retired some maturing medium-
and long-term loans from Western banks. Although
the leadership's conservative borrowing policies have
denied needed Western technology to the country's
aging industrial plant, they have ensured a solid
financial position and the lowest debt service ratio
(22 percent) in Eastern Europe.
Baseline. Czechoslovakia's current account will prob-
ably continue to improve this year, attaining virtual
balance if not a small surplus. The trade surplus
should rise by about $150 million to roughly $530 2
million, while interest payments on outstanding debt
will fall. Assuming a full rollover of all maturing debt,
Czechoslovakia's available funds would exceed its
projected financing needs.
Variants I and 2. Even if Prague had to repay one-
fourth of its maturing $560 million in medium- and
long-term debt, it still would not face a cash squeeze.
An additional 25-percent cut in short-term lending
under Variant 2 would produce a $155 million financ-
ing shortfall, but this could easily be covered by a 2
reduction in reserves. Even with a further drawdown,
reserves would still be adequate, covering some two
months of hard currency imports.
Variant 3. Western government credit sanctions
would probably have only a small impact on Czecho-
slovakia's trade and payments. Although officially
backed credits are projected to cover more than one-
third of Prague's medium- and long-term borrowing
 Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3
requirements in 1982, denial of these funds would
force a cut in nominal imports of no more than 5
percent. Since bank-to-bank financing is less impor-
tant for Czechoslovakia than for other East European
countries, a sharp cutback in bank credit lines with
Prague would not be extremely damaging as long as
Czechoslovakia could maintain access to supplier
financing. However, if widespread reductions in
medium-term supplier credits forced Prague to rely
more heavily on short-term financing for imports, its
debt management would be complicated by a more
compressed maturity structure.
Adjustment. A shutoff of Western credits would
probably have little internal impact on Czechoslova-
kia. Prague has already sacrificed growth to minimize
dependence on Western trade and credits. Hard cur-
rency debt is equal to only 4 percent of GNP, the
lowest ratio for all of Eastern Europe. Moreover, with
its current account in balance or surplus, Prague can
meet basic import needs out of current earnings
Bulgaria
Another large trade surplus in 1981 enabled Bulgaria
to retire $600 million of hard currency debt. In 1982,
debt service should be about the same as in 1981-
around $1 billion. Bulgaria should have no trouble
meeting debt service obligations and import require-
ments with a combination of sustained exports, suppli-
er credits, and official and commercial loans. Thus
the baseline scenario would involve few adjustments
for Bulgaria. Furthermore, conditions as described in
Variant I and Variant 2 would only prevent Bulgaria
from retiring its hard currency debts as rapidly as it
could otherwise. Bulgaria's solvency would only be
threatened by a virtually complete credit cutoff from
the West. Moreover, though the span of the Soviet
umbrella may actually be quite limited, Bulgaria
remains very close to its center.
 Approved For Release 2007/02/13: CIA-RDP83BOO228ROO0100100004-3
Secret
Appendix
Eastern Europe:
Hard Currency Debt,
Current Account Balances,
and Borrowing Sources
Eastern Europe: Hard Currency Debt a
Million US $
Except As Noted
1980
1981
1980
1981
1980
1981
1980
1981
1980
1981
1980
1981
1980
1981
Gross debt
24,840
26,000
9,457
10,700
16,900
18,400
13,900
14,500
9,100
8,700
4,890
4,620
3,510
2,975
Officially
guaranteed
10,350
13,500
2,000
2,100
2,250
2,350
2,500
2,900
400
400
850
900
440
475
Private
14,490
12,500
6,277
7,050
12,550
13,250
11,400
11,600
8,700
8,300
4,040
3,720
3,070
2,500
IBRD/IMF
0
0
1,180
1,550
2,100
2,800
0
0
0
0
0
0
0
0
Reserves
650
150
489
350
1,370
1,800
2,150
1,750
1,390
990
1,250
900
780
850
Net debt
24,190
25,850
8,968
10,350
15,530
16,600
11,750
12,750
7,710
7,710
3,640
3,720
2,730
2,125
Debt service
ratio b (percent)
101
148
25
32
47
76
55
69
30
37
18
22
32
36
Debt-to-GNP
ratio (percent)
15
16
8
8
25
27
10
10
17
15
4
4
9
7
Reserves-to-
imports ratio
(percent)
8
2
6
5
13
17
30
25
30
22
27
20
38
34
a Preliminary estimates.
b Repayments of medium- and long-term debt plus interest on net
debt as a share of exports to non-Communist countries.
 Table A-2
Eastern Europe:
Current Account Balances a
1980
1981
1982
1980
1981
1982
1980
1981
1982
1980
1981
1982
Current account balance 940
560
470
-393
-150
70
-1,919
-1,900
-1,500
-486
-580
-420
Trade balance 997
616
400
7
375
530
-1,909
-1,391
-1,240
279
443
440
Exports 3,056
3,092
3,370
4,597
4,827
5,070
5,185
5,703
6,000
4,911
4,862
4,960
Imports 2,059
2,477
2,970
4,590
4,452
4,540
7,094
7,094
7,240
4,632
4,418
4,500
Net invisibles 255
excluding interest
287
320
-30
-30
-30
900
1,025
1,050
0
0
0
1980
1981
1982
1980
1981
1982
1980
1981
1982
Current account balance -2,600
-1,340
-2,600
-2,399
-800
-450
-2,200
-1,400
-1,200
Trade balance -700
60
600
-1,534
175
500
-5,700
-5,200
-4,700
Exports 7,400
5,515
5,400
6,503
7,250
7,500
4,900
5,400
5,900
Imports 8,100
5,455
4,800
8,037
7,075
7,000
10,600
10,600
10,600
Net invisibles 300
(excluding interest)
500
100
-77
25
50
4,500
5,700
6,300
 Approved For Release 2007/02/13: CIA-RDP83BOO228ROO0100100004-3
Secret
Eastern Europe: Borrowing Sources, 1981
Total
9,140
4,085
5,430
6,400
3,680
1,950
910
Government-backed credits
5,750
400
400
800
110
265
140
Private credits
(medium- and long-term)
2,810
2,000
2,830
2,400
1,500
190
270
IBRD/IMF credits
0
370
800
0
0
0
0
Short-term credits
900
640
1,400
2,500
2,000
1,450
500
Other and unallocated
-320 a
675 b
0
700 c
70
45
0
a Poland reported a net outflow of $313 million in extensions of trade
credits through 30 September 1981.
b Net total presumably reflects payment arrearages (inflow) less
extensions of trade credit (outflows).
c Appparently results from the sizable appreciation of the dollar
against the West German mark and Swiss franc in which much of
East German debt is denominated.
 Secret
Secret
Approved For Release 2007/02/13: CIA-RDP83B00228R000100100004-3