Despite appearances of administration unity, a group of senior officials including Defense Secretary Caspar W. Weinberger urged earlier this month that the United States threaten new and harsh financial measures against the Soviet Union and Poland.
Weinberger, U.N. Ambassador Jeane J. Kirkpatrick and others in the administration who wanted to take a stronger stand on Poland suggested warning the Europeans that unless they adopt stronger sanctions against the Soviets and Poles, the United States could declare Poland formally in default on its huge borrowings.
This would have the practical effect of declaring Poland bankrupt, and would force hundreds of commercial banks in the capitalist world to call in Poland's debts and seize its available assets. This, in turn, would cause a credit crisis for the entire Soviet bloc and shut down the East-West trade that is a major economic boon to West Europeans, particularly West Germany.
In the view of State Department officials who successfully resisted this idea, such an American policy would produce "a double defeat" for the United States, as one of them put it. It would "destroy the alliance and hand Poland back to the Soviets," this official said.
Secretary of State Alexander M. Haig Jr. and Treasury Secretary Donald T. Regan argued successfully inside the administration for a more gradual policy, based on cooperation with the allies. Forcing a default, they argued, would cause a crisis in the western banking community, which stands to lose as much as $7.4 billion from a Polish default. Moreover, bringing on default would only deprive the West of the leverage it enjoys: the prospect of continued financial assistance to Poland and a resumption of normal economic relations if martial law is eased, these officials argued.
The administration's internal debate was settled at least tentatively before last Monday's meeting of the NATO foreign ministers in Brussels. Officials defending the moderate view in the debate said the results of that NATO meeting proved them correct, because the allies agreed to consider further economic sanctions if martial law is not speedily lifted. A senior State Department official said further steps to toughen the western stance could be expected in the next fortnight if the situation in Poland does not change.
The hawks in this internal argument contended that as punishment for the imposition of martial law the United States could force the Soviets to either make good on Poland's debts or face the prospect that Poland, and perhaps all of the Soviet bloc, would lose its creditworthiness. They said the United States should do more to counter the forcible smashing of Poland's 16-month flirtation with liberalizing reforms. "We should have done more," said one of the senior officials on the losing side of the argument thus far.
It is officials in the State Department--the apparent moderates in this dispute--who have tried to get a grain embargo against the Soviets put near the top of the list of possible sanctions in response to martial law in Poland. But the White House has ruled out a grain embargo for now on domestic political grounds. President Reagan has lifted the partial grain embargo imposed by President Carter in 1980 after the Soviet invasion of Afghanistan.
Said one administration moderate of the hawks who pressed for a tougher line with the West Europeans: "It would be nice if some of them would stand up on the grain embargo."
The hawks' argument reflected deep divisions within the conservative community over the Polish crisis. In recent days a virtual who's who of conservative commentators, neoconservatives and New Right activists have assailed the Reagan administration for alleged weakness in its response to the declaration of martial law. They include columnists William F. Buckley Jr. and George Will, the editorial page of The Wall Street Journal, Heritage Foundation president Edwin Fuelner and others.
Last Sunday a new group calling itself The Committee for the Free World--composed of leading neoconservative intellectuals such as Norman Podhoretz, editor of Commentary magazine; his wife, writer Midge Decter; and authors Saul Bellow and Irving Kristol--placed a full-page ad in The New York Times that said the Polish crisis created "an historic opportunity" to recognize "the illusions of detente" and "to hasten the day when the world will be free of Soviet imperialism . . . . "
The idea of forcing Poland into formal default on its huge borrowings from the West raises extremely touchy issues both for the banking community and for the West Europeans, who have come to rely on East-West trade as a significant provider of profits and jobs.
This trade has increased dramatically over the last 10 years because western governments and banks have been willing to extend nearly $90 billion in credits to Eastern Europe. With these credits, the Soviet Union and its allies have bought factories from the West, machinery, computers, grain, butter and meat.
Poland has run up debts of nearly $27 billion, counting all loans from European, American, Arab and Brazilian banks and credits from western governments and the Soviet Union itself. Of this debt, $7.4 billion represents loans from American, Japanese and West European banks that are not guaranteed by their governments. Some 500 banks have made these loans to the Poles.
Technically Poland's central bank is already in default since it is behind on its interest and principal payments for 1981. However, the consortium of western banks is still hoping to work out new terms for the loans that would allow them to be refinanced, avoiding default.
In recent weeks, the Poles have made partial payments on their 1981 obligations. According to one New York banking source reached yesterday, "If the Poles continue to dribble money in, the banks will continue to sit on their hands." Therefore, this banker said, "The ball is in the court of the western governments," who also are owed billions by the Poles and could decide to call a default for political reasons.
It was the threat of this government-declared default that Weinberger, Kirkpatrick and their allies in Washington wanted to use to compel the Europeans to impose sanctions against the Poles and the Soviets.
However, that could mean steps that would harm some American enterprises, too. Most significantly, International Harvester, a company in desperate straits, is planning to sell the Soviets $300 million worth of engineering expertise and technology to build a giant plant that can produce agricultural combines.