EAST GERMANY'S FINANCIAL SITUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP02-06156R000100140001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: May 17, 2012
• Sequence Number: 1
• Publication Date: November 22, 1982
• Content Type: MEMO

~ 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
Central Intelligerxe Agency
DIRECTORATE OF INTELLIGENCE
22 NOVEMBER 1982
East Germany's Financial Situation
Summary
control to manage its difficulties.
term adjustment strategy and is relying on tighter central
East Germany remains vulnerable to a liquidity crisis next
year, but should pull through if it is able to run a current
account surplus at least as large as this year's and does not
suffer a further reduction in Western credits. The domestic
economy, however, is straining to generate a resource outflow to
the West after years of large current account deficits.
Nonetheless, the leadership appears unwilling to adopt a long-
requested by Robert Cornell, Deputy Assistant Secretary for Trade
and Investment, US Department of State. Comments questions
are welcome and should be directed to Chief a 25X1
European Division, Office of European Analysis, 25X1
East European Division, Office of European Analysis. It was
This memorandum was prepared by 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
The East German financial position weakened markedly early
this year in the wake of the general cutback in bank lending to
Eastern Europe. Data from the Bank for International Settlements
(BIS) show that Western banks reduced their exposure by nearly $1
billion during the first quarter, forcing the East Germans to
drawdown their reserves by about $600 million to cover maturing.
obligations. East Germany suffered a further $400 million loss
in credit lines during the second quarter but was able to halt
the loss of reserves. BIS statistics do not reflect East German
financial activities with West Germany, about which we have scant
information.
The regime reacted to the credit squeeze by enacting a
number of measures to slash imports of feedgrains, luxury
consumer items, and spare parts and further encourage the export
of virtually all marketable goods. Imports from the West dropped
by about 10 percent in the first half of the year, according to
IMF data, while exports grew by 7 percent. Additional government
efforts later in the year to cut imports and push exports
underpin our judgment that East Germany could record an $800
million hard currency trade surplus this year and move its
current account into surplus by $475 million.
Western banks differ in their assessments of East Germany's
creditworthiness. Some bankers, fearful of a financial crisis
early next year, have told US officials that they plan to
continue reducing exposure, but bankers talking to Embassy East
Berlin apparently still regard the economy as basically sound
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
despite its $13-14 billion debt and 63 percent debt service
ratio. In discussions with US officials some bankers point to
punctual East German debt service payments as proof that the
situation is under control. Nonetheless, we estimate that at
best East Germany will be able to roll over only $3.8 billion of
its $5.3 billion in maturing credits and will have to draw down
reserves by over $1 billion to cover its financing gap this -
year.
We project that next year's financing requirement will fall
to $3.6 billion largely because this year's cutback in lending
will reduce debt repayment obligations. This projection also
assumes that East Germany can raise exports slightly above this
year's level while holding imports at the 1982 level and that
lower interest rates will reduce debt servicing costs by about
$200 million. If it is to cover this requirement, East Germany
cannot suffer a further substantial loss in Western credits since
it will have a much smaller cushion of reserves. It is still
vulnerable to any decline in banker confidence that would result
in a rapid outflow of its still large, short-term debt.
East Germany's efforts to deal with its external financial
constraints through import cuts and an export drive are having an
increasingly severe impact on the domestic economy. According to
East German statistics the growth of national income slowed to an
annual rate of 3 percent in the first half of 1982, down from
last year's 5 percent rate. Continuing import restraints suggest
that full year growth will probably fall to less than half of
this year's target of 5 percent and that next year's objectives
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Co A roved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7 25X1
pY pp
~ ~
will not be met either. The US Embassy in East Berlin reports
that consumer supplies appear to be deteroriating; according to
the US Mission in West Berlin, the West German government
suspects that formal rationing could be introduced before long.
The regime's response to its financial problems has been to
adopt quick-fix solutions--no matter what the cost to the
economy--and to avoid formulation of a long-term adjustment
strategy. Unlike some other East European countries, there
appears to be no movement toward introduction of market forces
into the economy. Indeed the leadership seems intent on relying
solely on tighter central control in order to master the current
liquidity squeeze.
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
Statistical Note
Contradictions between East German and Western partner trade
data, as well as the lack of basic data on West German-East
German credit flows, force us to be quite cautious about our
projections for East Germany. For the first time since the mid-
1970s, East Germany released statistics on its exports and
imports with nonsocialist countries for 1980-81. (The CEMA
handbook, which has regularly reported East German trade with the
West, has not yet been published for 1981.) The new East German
statistics show that East Germany's trade balance with the non-
socialist area moved from a $1.8 billion deficit in 1980 to a $60
million surplus last year as a result of a 4 percent fall in
imports and a 28 percent gain in exports. IMF Direction of Trade
statistics plus inner-German trade data, on the other hand, show
the deficit declining from $430 million in 1980 to $240 million
last year due to a 5 percent decline in exports and an 8 percent
fall in imports. Our estimate for the 1981 trade deficit accepts
the East German import total of $7.1 billion, but we have
increased exports by only 7 percent over 1980 to $6.3 billion.
This yields a trade deficit of $800 million, which appears
consistent with known net credit flows from the West.
Banks in West Germany do not report their assets and
liabilities with East Germany to the BIS. The Inner-German
Affairs Ministry regularly reports the net accumulated debt
arising out of inner-German trade. We believe, however, that
this total does not include credits from West German banks that
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
are not related to West German-East German trade. Because West
German banks have been providing non-trade related financing
since at least the mid-1970s, East Germany's debt to West Germany
is almost certainly greater than the announced totals.
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
East Germany: Estimated Financing Requirement 1981-83
(millions US $)
1981
1982
1983
Financing Requirement 6065
4825
3600
Current Account Balance
-1315
475
850
Trade Balance
- 800
800
900
Exports
6300
6900
7000
Imports
7100
6100
6100
Net Invisibles, excluding
interest
985
1075
1150
Net Interest
-1500
-1400
-1200
Repayments of Short-term Debt
-2500
-2350
-1750
Repayments of M/LT debt
-2250
-2950
-2700
Borrowing Sources
5750
3800
-
Medium and long-term credits
3200
2050
Short-term Credits
2350
1750
Er
Ch
ror and Omissions
ange in Reserves
350
35
0
-1025
Re
serves
2585
1560
In BIS reporting banks
2185
1385
In West German banks (estimated)
400
175
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
East Germany: Debt Statistics (end-June 1982)
1982
(bi~.lion dollars)
Total Gross Debt
13
6
Maturity
.
Short-term
1.9
Medium and long-term
Distribution
11.7
Official (excluding West Germany)
Private (non-guaranteed excluding
2.5
West Germany)
g.4
Inner-German debt
1.7a
a Estimated gross debt differs from West German officially
reported figure for accumulated net deficit on inner-German trade
of $1.4 billion (DM 3.4 billion) because it has not been adjusted
for the estimated $300 million in East German assets in West
German banks.
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
 Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7
Western Creditor Exposure to East Germany
(billion US $)
Western Government Commitments of Both
Principal and Interest (end-1981)
Totala
6.5
Austria
France
1.4
FRG
1.4
Italy
_
1.0
Japan
0.3
Netherlands
1.2
Switzerland
0.1
UK
0.2
Other
0.2
0.7
Western Bank Claims excludin West German ?
including guaranteed c aims as o 30 June 1982)b
8.8
~Of which
UK (Total)
(unguaranteed)
(1.7)
US (unguaranteed)
(1.6)
a Totals for all countries except West Germany are taken
from Berne Union statistics. West German commitments, which
cover principal only, are estimated from NATO credit statistics.
b Bank for International Settlements statistics.
Declassified in Part - Sanitized Copy Approved for Release 2012/08/22 :CIA-RDP02-061568000100140001-7