The explosive growth in Soviet-bloc debt confronts the West with a "serious" and continuing problem, a study here has concluded.
An unpublished report by Prof. Richard Portes of London University warns that the expanding mountain of Eastern European debt could reach $100 billion by 1980. By then, Poland for one will probably need to have its debt "rescheduled," a banking term for making new loans to save old ones from default.
This state of affairs, Portes says, is made even more precarious because the biggest share of the credits is now coming from virtually unregulated private Western banks. Their entry "imples a straightforward loss of governmental control over Western lending policy."
According to Portes, these bankers are employing foreign deposits in the uncontrolled Euromarket, displaying dubious judgment about credit risks and lending to the bloc on a fraction of the information and none of the collateral required from conventional borrowers. The bankers appear to be counting on Western governments to bail them out, for both political and economic reasons, if their loans go sour.
Portes concludes that the mounting bloc credit not only endangers Western banks but also tends to drive weaker satellite debtors closer to the Soviet Union. This is the very reverse of a justification often advanced for making loans to Poland, Bulgaria and others.
Portes is a Yale and Oxford-trained economist, a former Rhodes scholar who has taught at Princeton. His paper, which is circulating among European and U.S. officials concerned with Soviet trade, is believed to be the first serious attempt to assess the implications of the credits.
The organization for Economic Cooperation and Development, spurred by warnings from former Secretary of State Henry A. Kissinger, has compiled its own extensive statistical analysis of East-West credits.
But this still-secret report scrupulously avoids any conclusions. Some OECD members, notably the French, regard the concern in Washington as a trick to deprive Western Europe of markets and influence in the East.
Western credits to the bloc, almost equally divided between government-backed and purely private loans, have mushroomed in the last five years.
By the end of last year, bloc debt to the West was estimated at $40 billion, including $15 billion for the Soviet Union and an outsized $10 billion in Poland. But big as this is, Portes says, it understates the volume of IOUs the bloc has signed. All together, Portes calculates, the West has extended credits of nearly $60 billion. The extra $20 billion is for loans against which no deliveries of Western goods have yet been made.
If the rate continues through 1980, Portes estimates, the debt then will stand at $100 billion. That would be well above the total extended to developing countries in the Third World, a credit risk that has just begun to worry Western banking officials.
The credits, Portes observes, would pose no problem if they financed industries that could produce a matching stream of goods sold to the West. But, he says, most of the capital and technology produces goods for sale inside the bloc - autos, petrochemicals and the like.
Portes questions the bloc's ability to generate enough exports to pay for the loans in any event. He takes no position on the argument frequently advanced that the economies of the East are too rigid to produce what the West would buy.
The London Economist describes a dilemma that makes debt repayment even more difficult. If the West expands, it widens the gap in technology over the East and makes Eastern goods even less salable outside the bloc or the Third World. If the West slumps, demands for protection against "unfair" bloc competition choke off markets. Finally, the complex Common Market system to protect European farmers cuts off potential agricultural sales from Hungary, Bulgaria and Romania.
What saves this house of cards from collapse, Portes believes, is the Western fear of default by any borrowing nation. Banks and governments alike worry that one country's going bankrupt would set off a "domino effect."
So India, Zaire and like nations have discovered that the West will "roll over" or "reschedule" debt payments they cannot meet. In effect, the debtors swap old paper for new, with Western governments standing behind their reckless banks.
In the Third World, however, these concessions are rarely made without some plan, supervised by the International Monetary Fund, to shrink the buying appetites of the borrowers. Portes observes that it is inconceivable that Poland or some other likely defaulter would allow the IMF in.
Portes foresees 1980 as a critical year. Then, a big chunk of loans will come due. "There is a signficant probability," he writes, "That at least Poland and perhaps other East European countries will have to reschedule their hard-currency debts."
Portes argues that the debt is now so big that it gives the borrower - not the lender - the leverage. The Soviet Union and the statellites can borrow without fear, confident that neither Western banks nor Western exporters can easily afford to cut them off. A collapse of loans would damage some banks and a sudden loss of Eastern orders could hit some manufacturers.
Private lenders have said they do not worry because the Soviet Union stands behind every bloc debtor. But if Eastern European nations must turn to Moscow to be bailed out, Portes says, their dependence on and ties to the Soviet Union will be much fighter.
Neither the U.S. Federal Reserve nor any other central bank has much control over the Euromarket operations of banks whose loans at home are supposed to be carefully scrutinized. In other words, bloc debt is fueled by unregulated and in inspected lenders.
At a minimum, Portes says, banks and governments must compel bloc borrowers to reveal the size of their burden, the maturities and interest on their outstanding debt. This data, required from every other borrower, private or public, is withheld by bloc nations.
Portes suggests that the West might "accept a fairly rapid growth in the debt" if terms and amounts were "coordinated" through an international body like the OECO. But, as the study observes, competitive rivalries - both political and economic - among Western nations has so far prevented any such moves.
There are only two ways to reduce the debt, Portes concludes. Countries with trade surpluses such as West Germany, Japan and the United States now and Britain over the next 10 or so years could agreed to take more of the goods that the East has so far been unable to sell. Or they could agree to finance the sale of such goods to Third World Nations.