EAST EUROPEAN FINANCIAL SITUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000200420020-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: July 13, 2007
• Sequence Number: 20
• Publication Date: March 24, 1982
• Content Type: REPORT

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SECRET 25X1
East European Financial Situation
1. The financial crisis in Eastern Europe is spreading as most
of the countries in the area are finding it hard to obtain
credits.
-- No East European borrower can at present obtain a
syndicated Eurocurrency loan.
-- Bankers are refusing to roll over some credits as they
come due.
-- Even the export credit agencies of some Western
governments are not willing to increase their lending.
-- If credit cutbacks accelerate, Hungary and the GDR, in
addition to Poland and Romania, could also face
rescheduling by the end of the year.
-- Lack of credits will result in sharp import cuts by the
East European regimes, which will slow domestic growth
and lead to political instability.
-- Some regimes may reluctantly turn to the USSR for help,
but Moscow will be able to offer little due to its own
serious problems.
-- Bulgaria and Czechoslovakia do not face serious
financial problems this year.
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SECRET 25X1
2. The bankers have taken several factors into account in
reassessing the creditworthiness of the CEMA countries:
-- the Polish and Romanian crises;
-- growing concern over Eastern Europe's own economic
problems;
-- lack of faith in the umbrella theory; and
-- political factors, such as the cooling of East-West
political relations, growing fears of political
instability in the region, linked in part to Polish
problems and fears of Soviet intervention.
3. Where each country stands:
a. Poland's financial mess continues in stalemate. There
is no chance that Warsaw can pay the $10 billion debt
service bill for 1982.
-- Apparently nearly all interest due to private creditors
in 1981 has been paid, and the long-delayed 1981 private
debt rescheduling agreement is now scheduled to be
signed on 6 April.
-- Potential remaining obtacles include payment of $23
million as a rescheduling fee due at signature and
payment of $600-700 million in 1982 interest the banks
are demanding before they agree to implement the
agreement in May.
SECRET
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There is a growing rift among banks, and some US bankers
believe that the rescheduling effort will fall apart and
lead to default by the end of this year.
Western governments have not begun rescheduling talks
for 1982 debt relief.
Poland has made no payments to the US government since
martial law; as of 1 March, Warsaw owed the US $48
million in unrescheduled 1981 obligations and interest
on rescheduled amount.
The virtual shutoff of Western credits and the need to
run a trade surplus to pay interest to Western banks
means that Warsaw cannot import the goods it needs to
mount an economic rebound.
The Soviets, faced with their own financial bind,
apparently have not provided Poland any direct hard
currency assistance in the past year.
b. Romania requested debt relief in January and faces many
of the problems Warsaw has encountered in the past year.
-- Some banks negotiated rescheduling terms with Bucharest
last month, but many other banks object to the terms.
-- Disagreements among banks--and consequent delays--are
likely over treatment of 1981 arrears of $1.14 billion,
short-term debt, and debt to CEMA.
-- Private debt relief is contingent on government
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SECRETI
rescheduling, but Western governments will not open
talks until Bucharest meets the terms of its standby
agreement with the IMF.
-- The IMF, however, wants arrearages cleared up before
reactivating the standby credit.
Even with successful rescheduling,
-- Romania will have a financing gap of up to $2 billion
and, given existing austerity, will have little chance
of covering it through import reductions.
-? The persistence of the financing gap means that Romania,
like Poland, will be unable to meet the terms of its
likely debt relief agreements.
c. Hungary
(1) Hungarian officials have put their 1982 financing
needs at $1.5 billion.
Budapest estimates that at present it can count on
only $600 million from commercial banks.
Without further support, Hungary almost certainly
would face debt rescheduling by midyear.
(2) Budapest is now trying to line up support from West
European central banks to bridge its cash shortfall.
-- The Bank of France and BIS have reportedly reacted
negatively to Hungary's request for a $200-500
-4-
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million loan from central banks through the BIS, the
loan would be repaid once Hungary could tap IMF
credit facilities.
-- Hungary hopes to cover at least $250 million of the
remaining financing requirement by marketing a major
syndication in April with commercial banks.
-- The Hungarians anticipate that a loan from central
banks and entry into the IMF would restore banker
confidence in lending to Hungary.
d. GDR
1. We estimate the GDR's financing shortfall could
reach $2-3 billion in 1982.
2. The East Germans have encountered difficulties in
lining up credits.
-- Western banks, including West German ones,
reportedly have refused to extend new medium-term
trade credits.
-- The East Germans apparently have approached West
German, French, and Belgian banks about a $300
million balance of payments loan, but final
agreement seems unlikely in the near future.
3. The willingness of West Germany to provide more
support would be critical to East Germany's efforts to
avoid debt rescheduling if the lending cutback persists
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FRG Economics Minister Lambsdorff recently, asserted
that lender caution about Eastern Europe should not
extend to the GDR.
-- Unless the GDR makes concessions on humanitarian
issues, Bonn may reduce the 850 million DM ceiling
on the interest-free swing credit after 30 June.
4. Yugoslavia: While not a CEMA member, bankers are concerned
about its economic and financial problems and have cut back on
lending.
Belgrade will probably not be successful in its new bid
for a $400 million syndicated loan that was refused in
late 1981.
Some Yugoslav banks have requested extensions on
payments due at the end of March.
Yugoslavia has the benefit of IMF membership and could
obtain more loans from OPEC.
If these sources are not enough, painful import cuts
would be needed to avoid serious implications for growth
and political stability.
5. Government-guaranteed credits provide some savings to Eastern
Europe:
A very rough estimate of the Western interest subsidy to
Eastern Europe (excluding Yugoslavia and Poland) in 1981
is $500-600 million, equal to roughly 2 percent of the
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region's earnings from exports to the West.
This estimate excludes Poland because Warsaw's
substantial arrearages in interest payments on its debt
make the question of interest subsidies not relevant.
The principal beneficiary is East Germany because it has
a comparatively large debt on official and officially-
backed credits ($2.9 billion) and because it has access
to as much as $375 million in interest-free credit from
West Germany (the "Swing" credit).
Hungary benefits little since officially-backed debt
accounts for only about 5 percent of its liabilities.
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