How should the Reagan administration react to growing internal pressures for the United States to declare Poland's debts in default?

Our country has so long regarded itself as the leader of the Western Alliance that many of us take for granted the commanding authority of our official pronouncements and reactions; yet, on any principle of equity, the parties with the most to lose should have the largest vote in shaping a concerted Western response. In respect to the Polish debt issue, America is a junior partner, since the main burden of a declared default would fall on our European allies. Poland owes four nations of Western Europe-- West Germany, France, the United Kingdom and Austria--official and private debts amounting to $10.6 billion; the comparable figure for the United States is $3 billion. Even more pertinent, commercial banks of those four countries hold Polish debt unguaranteed by governments amounting to $5.5 billion as compared with $1.3 billion held by American banks. Thus U.S. banks could easily absorb a Polish default but European banks, already suffering from severe depression, could incur heavy losses. The non-guaranteed Polish debt exposure of the big German trade union Bank fur Gemeinwirtschaft amounts to 40 percent of its total net worth, while Germany's Commerzbank (one of the "big three") is exposed to the extent of 24 percent of its net worth. Austria would be even more critically shaken by a declared default since its banks and government hold 6 percent of Poland's total debt to the West.

But in the view of some Americans, Poland's current credit plight is merely the result of the inordinate greed of our Western allies and their dangerously soft line toward the Soviet bloc. "Why," they ask in the songwriter's plaintive words, "can't the others be like us?" Such parochial self-righteousness, however, ignores distinctions of both geography and history. It overlooks the fact that Poland is still in spirit and tradition a Western country; to French and Germans and even British, it is still part of Europe. The Poles and their Comecon neighbors remain Europeans even though encaged by an Iron Curtain. Over the centuries the flow of goods and capital between Eastern and Western Europe has been a good part of the continent's economic life, and, especially during the period of d,etente, habit, tradition and compassion triumphed over artificial, brutally enforced, political barriers.

Thus Western Europeans would bitterly resent any attempt by the United States to destroy their trade with the East, which has been integrally built into their economic life, while the West Germans would be deeply grieved by any threat to the arrangements they have painfully developed for ameliorating the hardship of divided families in a divided country. Not only would they refuse to join in any American-sponsored economic quarantine, but they could never forgive us should we--in pursuit of an ideological objective they regard as self-defeating--precipitate a banking crisis in the soggy economic climate they already blame on America's monetary policies. They would see such a destructive enterprise as final confirmation of their already dark suspicions that we ethnocentric Americans have become ever eager to strike a righteous pose at Europe's expense.

The Reagan administration narrowly avoided falling into the trap of its own sanctimony when it recently decided that American banks should not be required to declare a default on the Polish debt in order to receive reimbursement from the Commodity Credit Corporation on its guarantee. But that decision was, as the Duke of Wellington said of Waterloo, "a close-run thing" and, in this case, far from definitive. Secretary of Defense Caspar Weinberger and his cohorts are now threatening to force a reconsideration. They seem oblivious to the fact that an American unilateral action to declare a default would go far to wreck the alliance; nor do they seem to care that it would constitute a cruel slap at the already beleaguered Polish people for whom the resultant drying up of credits (including normal trade credits) would mean near-starvation during the bleakly cold Polish winter.

Even if the desperate Polish situation can be resolved without invoking the machinery of default, that does not mean that the Soviets and their satellites will be exempt from financial strain. The Comecon nations are all beginning to suffer from the slowdown in Polish productivity and the production shortfalls of Polish industry and agriculture, while Poland's economic troubles are curtailing Western credits to the whole Comecon bloc.

The total Soviet financial system is thus already under pressure. The U.S.S.R. suffered a $6 billion current account deficit last year, and its satellites will probably incur an additional $6 billion or $7 billion deficit with Western Europe this year; they are hoping to restore their hard currency reserves largely by the shipment of gas through the projected pipeline that the Reagan administration is now frantically trying to block. The Soviets have been drawing down deposits in Western banks and selling gold. They are likely to react to any further financial pressure primarily by impoverishing the Polish people.

The only issues so far seriously discussed are how to handle the carrying charges on Poland's debt for 1981 and 1982. But, as the experts well know, a more difficult problem is our attitude toward new credits (amounting to $4 billion to $6 billion during 1982) required to support economic life at anything like tolerable levels and permit the rebuilding of the Polish economy.

Its decision on that issue will critically test the administration's fundamental strategy for dealing with the Soviet Union, and it is well that the issue be sharply drawn. On one side will be those who would continue the general line of policy we have pursued ever since the early thawing of the Cold War a decade ago. In general, we have favored measures that would weaken the Kremlin's hold over Eastern Europe and draw its imprisoned peoples more tightly into the West. But now we are hearing the angry voices of the hard-line conservatives (the neo-isolationists) arguing instead for a reversion to the most primitive strategy of the Cold War--that we insulate the Soviet power system, strengthen its prison walls and seal off both oppressor and victims hermetically.

The central thesis of this group is that we should use the Polish debts to punish the wicked Soviets. Felix Rohatyn has lent his support by advocating that we declare "Poland bankrupt" and thus "put the burden of the Polish economy squarely on the Soviet Union," and, for reasons that pass all understanding, even Weinberger seems to have joined the clamorous mob.

One of the principal hard-line arguments is that a Soviet government short of capital might have to curtail its military expenditures, but that is pure speculation. The more likely Soviet reaction would be to starve its own people while strengthening the political clout of a military sector already gaining alarming influence.

But that logic escapes the most fanatical and vociferous hard-liners who are eager for confrontation--tending to confuse vindictiveness with policy and to derive their most exquisite pleasure from putting an indiscriminate thumb in the Soviet eye. To them the East-West struggle is a religious war. Some are even bemused by the fantasy that harassing the Kremlin will contribute to the dissolution of a Soviet Empire that, they wishfully argue, is already in an advanced state of decay. When our friends across the Atlantic disdain such a crusade, the hard-line conservatives respond: "So much the better; America can act more freely if we need no longer have to compromise with effete allies." That is a central tenet of the isolationist credo.

Luckily for our republic and the peace of the world, the great bulk of Americans are not ideologues; they are practical men and women who see little virture in hectoring the Soviets just for sport. They do not wish to increase Polish suffering (one should not kick one's friends when they are down even for ideological reasons) nor do they want our country to be isolated or our European friends left alone to make their own separate accommodations with Moscow. Finally, they have no desire to increase the polarization of a world already at odds with itself.

So one can still hope that, once they are informed of the facts and their implications, they will recognize that we can gain nothing by helping to precipitate a world financial stringency that would blight both West and East, and that no useful purpose could be served by measures that would only further grind down the Poles. Not only would such measures be out of character for America and imprison Poland more hopelessly in the suffocating Soviet system; they would also provide the Soviets with a powerful propaganda weapon. "The greedy Western capitalists," so the Kremlin would tell the Poles, "are doing what they always do: using usury to starve you. Under their corrupt system, they care only for money." To a people suffering bitter hardship during an icy Polish winter, what could be more persuasive?

But if we are to avoid using Comecon's capital plight in a way that would increase the forced unity of the Soviet bloc, could we not still use it to gain help for the Poles? Assuming that we and our Western allies could agree on a negotiating strategy, should we not delicately undertake some quiet exchanges both with the Jaruzelski regime and with Moscow, presumably through an Eastern European intermediary? The Western nations could indicate their willingness to provide continuing limited help to assist Poland's extrication from its financial predicament in return for a visible Soviet contribution to the Polish people as well as visible measures to ameliorate repression and permit the Poles greater individual freedom. Quiet diplomacy is a hard discipline for a public such as ours, but it is far better than bluster and meaningless public threats.