The Red Army is dug in just 200 miles from the skyscraper home offices here of West Germany's largest banks, but its guns and tanks are far from the minds of German bankers this spring.
"All these years we have thought of East-West relations in terms of missiles and terror," said an international financier. "Now we are finding that it all really just comes down to money."
As of last Sept. 30, the Soviet Union and its six East European allies owed Western commercial banks $65.4 billion--an eightfold increase in communist debt since 1970. Both Poland and Romania have fallen behind on their interest payments to Western banks, and even the Soviet Union reportedly has asked some Western companies for a few months' grace in paying bills.
Western financial institutions have become involved so deeply in the affairs of communist countries that several New York banks have specialists who work full time just on Romania, and financiers from Chase Manhattan and Deutsche Bank regularly advise Communist officials in Warsaw and Bucharest on how best to revamp their economies to pay back loans.
This is a new and unprecedented situation in the history of East-West relations. In the initial phases of detente in the early 1970s, the West used offers of expanded trade and credits to encourage the Soviet Union to join in arms talks and ease curbs on ties between East and West Germany. The economic issues were viewed as secondary to improving political relations overall.
Today, however, the West has lent so heavily to Eastern Europe that financial matters have become a key factor in East-West ties, and there are fundamental differences about how to handle them.
Defense Secretary Caspar W. Weinberger and some senior officials in the Reagan administration have advocated denying credit, technology and food to the Soviet Bloc to destabilize the area economically and force the Kremlin to divert resources away from military development.
Administration officials say, for instance, that they could force Poland into financial default as punishment if the military government does not end martial law. The administration also is pressing its European allies to stop subsidizing the loans that private banks make to the Soviet Union.
Such proposals fit with the administration's robust anti-Soviet stand, but critics say they cut two ways. West European governments and State Department officials argue that economic warfare against Soviet satellites would shove all of East Europe firmly into the arms of the Kremlin. Powerful private interests on both sides of the Atlantic also would be hurt: U.S. agribusiness, which supports grain sales to the East; West German heavy industry, which is disproportionately dependent on the Soviet Bloc as a market for steel, large-diameter pipe, chemical plants and other "big ticket" items; and West European banks, which are much more heavily exposed in Poland than American banks are. Punitive economic measures also could hurt Hungary and Yugoslavia, two communist countries with relatively progressive governments, and thus discourage liberal experiments in the East.
"If Reagan puts on enough pressure, he can create economic chaos," said a Hungarian editor. "He can lower the living standards in Eastern Europe. The Soviet Union would be hurt too, but it lived through four years of war that were far worse. The U.S. pressure wouldn't result in uprisings in Eastern Europe but in anger at the United States."
Both U.S. and West European bankers have expressed strong objections to employing finance for political ends.
Henry C. Wallich, of the U.S. Federal Reserve's board of governors, warned in February that it would be "extremely dangerous" to use "the threat of financial crisis as a means of achieving political objectives."
"Using the international financial system as a political instrument is dangerous," echoed Hannes Androsch, Austria's former finance minister and chairman of Vienna's Creditanstalt Bank, which holds a major share of Austria's $1.8 billion in loans outstanding to Poland.
"We are strongly opposed to martial law in Poland," Androsch said. "But one should bear in mind the fact that in Turkey there's martial law and in the Philippines there's been martial law for 15 years or more, not to mention some African and Latin American countries."
Despite such pleas, Western financiers acknowledge that their own actions already have influenced policy in Eastern Europe and that the banks' problems are partly of their own making.
Starting in the mid-1970s, the banks loaned large sums of money to the Soviet Bloc nations, often without government guarantees or security arrangements. The banks assumed that the Soviet Union, which always had taken pride in an excellent credit rating, would not allow its satellites to fall behind in paying their debts. The banks also were motivated by the desire for an outlet for the large petrodollar surpluses deposited with them by oil-producing nations following the quadrupling of world oil prices in 1973-74.
The credits from the West helped East Bloc governments to pursue expansionary policies that they in fact could not afford. As economic conditions began to deteriorate in 1979 and 1980, the banks became increasingly nervous about the extent of their exposure. The result was a call for more austere policies in the East, pushed primarily by the major U.S. banks despite objections by their West European colleagues. The new austerity measures have in turn destabilized Eastern governments by increasing the burden on consumers and causing popular discontent.
This chain of events has come to light at a time when the Polish military crackdown is forcing Western governments to confront the seeming contradictions and startling paradoxes that have been present in East-West relations since the start of detente in the early 1970s.
Throughout the decade, military strategy and economic policy in both East and West moved forward on separate tracks As Western governments were spending billions of dollars to defend against possible attack by the Warsaw Pact, Western banks were completing the financial deals essential to expanded trade and economic relations with these same communist nations.
While defense contractors benefited from the continuing arms race, U.S. and European farmers, chemical companies and steel industries benefited from a climate in which credits and trade were encouraged. East Europe's dependence on Western trade grew steadily: Poland and Romania ship 35 percent of their exports to the West, and the figure for Yugoslavia is 49 percent.
Different branches of the Western governments often seemed to be following contradictory policies. As the military built weapons, trade promotion agencies of the same governments were extending credits to the communist governments or guaranteeing the loans made to them by private banks and companies.
Bankers, businessmen and East European countries are now waiting for the Western governments to provide a clear signal on whether East-West economic and financial relations will remain on the course set in the 1970s or cut back drastically.
The West has plenty of ways to apply pressure if it chooses. Poland has asked Western governments to refinance loans from Western governments coming due in 1982. Hungary and Romania belong to the International Monetary Fund, and Poland is seeking membership. Moscow wants to extend its grain-buying agreement with the United States, scheduled to expire in October. East Germany wants the West German government to renew a special arrangement, expiring in June, in which Bonn provides a standing line of credit of about $350 million for buying equipment and technology.
There is also the still unresolved issue of U.S. trade sanctions against the Soviet Union. Regulations announced by President Reagan Dec. 29 prohibit U.S. equipment from being used in the Soviet natural gas pipeline. These regulations currently prevent companies in Britain, West Germany and Italy from shipping the Soviets more than $1 billion worth of pipeline turbines because the European turbines are fitted with U.S. parts. But U.S. firms and West European governments have been lobbying for the administration to modify the regulations.
Technically, these issues are separate from the matter of the East Europeans' debt to private Western banks. But financial sources say the actions of the Western governments are certain to affect these private financial arrangements.
For example, IMF membership for Poland would enhance its creditworthiness and eventually improve its chances for new commercial loans. Also, a decision by Western governments to refinance $2.2 billion of Polish credits due this year would pave the way for private banks to refinance their loans and stave off a write-off or default that could curtail economic relations between Poland and the West for years. The situation in Poland offers a clear example of how Western banks dug themselves into a hole in Eastern Europe and affected events there in the process.
Lawrence J. Brainard of Bankers Trust, testifying before the European subcommittee of the Senate Foreign Relations Committee in January on the "background and perspectives" of the Polish debt crisis, painted a picture of complicity between Western banks, Western governments and the regime of ousted Polish leader Edward Gierek in running up huge debts that had little chance of being repaid.
The Gierek administration, following what Brainard called a policy of "populism pure and simple," turned to Western banks in the early 1970s to satisfy the needs of workers, farmers, consumers and industries. Lacking political support for economic reforms that could have resulted in higher prices and belt-tightening, the Gierek government covered its weaknesses with foreign borrowing. Western banks accommodated this policy, and Poland's foreign debt rose from $11.5 billion to $24 billion between 1975 and 1980.
According to Brainard, U.S. banks were more careful about their lending than West European or Japanese ones. In 1975, Chase Manhattan insisted on obtaining extensive financial data before extending a credit for the development of a copper mine and smelter. Non-U.S. banks, however, were providing Polish importers with two- and three-year credits to buy feed, raw materials and spare parts--items usually paid for with cash or short-term loans.
Meanwhile, Brainard said, Western governments, including the United States, were "bending the rules on official credits" because of Gierek's popularity and reputation as an East European leader who was trying to satisfy consumers and workers.
"The Gierek government was largely successful in leveraging its political ties with the United States and Western Europe to secure additional credit," he said. "The Carter administration, for example, substantially increased financing for Polish grain purchases under Commodity Credit Corp. arrangements."
In 1979, despite rising fears about Poland's creditworthiness, the Bonn government put heavy pressure on a consortium of West German banks to make a $500 million loan and threw in the sweetener of a partial government guarantee.
Walter Seipp, chief executive of the Frankfurt-based Commerzbank, West Germany's third-largest bank, said that the government hoped that improved economic relations with Poland "could help to change to some extent the communist system and give some relief to the people in communist countries."
By 1981, Poland's total debt stood at $28 billion, and the bankers were becoming very restless. About $7.5 billion of that sum was unsecured, or uninsured loans from 501 commercial banks in Western Europe, Canada, Japan and the United States.
In meetings in April 1980, Western bankers urged Polish officials to increase prices to stabilize the economy. Those meetings, and the resulting price increases, helped "trigger the workers' revolt that swept across Poland" and led to formation of the Solidarity union the following August, according to a detailed article in Fortune magazine published in September 1980.
There are signs that Western bankers became uneasy with Solidarity because the unrest, strikes and economic disruption that accompanied its rise inhibited the Polish government from recovering its economic health.
Last Sept. 11, Chemical Bank's Paul McCarthy, speaking on the MacNeil-Lehrer television show, publicly acknowledged some misgivings about the political course taken by Solidarity. "Solidarity has to become understanding of how serious the financial problems are," McCarthy said. "It has to be willing to work with the communist government to retain centralized control over the economy until such time as a stabilization program begins to take effect."
As the Polish situation deteriorated throughout last fall, other East European countries began to feel the impact. Nervous Western and Arab banks withdrew hundreds of millions of dollars in short-term deposits from Hungary, Romania and Yugoslavia. The pullout caused sudden liquidity problems for countries already struggling to reduce trade deficits with the West and keep up their payments on the $6.8 billion, $4.6 billion and $9.8 billion, respectively, owed to commercial banks.
According to two senior State Department officials, U.S. government representatives have met with U.S. bankers to express "confidence" in the economic futures of Hungary and Yugoslavia.
Yugoslavia, although communist, is nonaligned and has good relations with the West. Hungary, although a member of the Soviet Bloc, is embarking on economic reforms and permits a fairly free flow of people and goods to and from the West. The State Department's 1982 report on human rights practices said that Hungary tolerates some emigration and its citizens "generally are free from arbitrary arrest."
"If Hungary isn't what we want to have happen in Eastern Europe, then what do we want?" asked Brookings Institution economist Edwin A. Hewett.
But U.S. officials say bankers so far have remained wary about extending new loans to either country.
A New York banker, defending the banking community's caution, described his position this way:
"You cannot ask commercial banks to loan out their depositors' money in order to support U.S. foreign policy."