Should the United States declare Poland's debts in default? Several distinguished commentators such as former president Ford, writer Norman Podhoretz and financier Felix Rohatyn have criticized the United States for not already doing so. An amendment submitted by Sen. Bob Kasten and recently adopted by the Senate would in effect require it.
Those advocating a default deserve an answer. I suggest that, while declaring Poland in default is an attractive political option, and one that still remains available, the Reagan administration's careful, deliberate, multilateral foreign policy formulation is the more appropriate course of action.
There seem to be two arguments in favor of calling a default: first, it would cut off Polish access to Western credit and currency, squeezing Poland's economy and bringing pressure on its military government; and second, it would punish Poland for violating human rights. It is possible, however, to achieve the same economic and political objectives without declaring a formal default; indeed, we have already achieved them more effectively by following our current course.
Together with our allies, we agreed at Versailles "to handle cautiously financial relations with the U.S.S.R. and other Eastern European countries," exercising "commercial prudence" and reporting periodically to the Organization for Economic Cooperation and Development "all aspects" of the financial relationships. Because of the uncertainties of repayment, private lenders in the United States and abroad are extending little or no new credits to Poland. We and other official creditors have insisted on payment of the 1981 obligations that were not rescheduled. At present, the Poles are continuing to make payments to the West.
Perhaps most important, we and our allies have suspended any talks on rescheduling Poland's 1982 debt maturities, and are insisting that Poland service all obligations as they fall due unless Poland satisifies three conditions: 1) an end to martial law; 2) freedom for all detainees; and 3) resumption of a genuine dialogue with Solidarity and the church. There is no reason for the United States to reconsider this position: indeed, it was just reaffirmed by the allies at their meeting in Luxembourg May 17-18.
One could make an argument for default if Polish obligations could be satisfied by attaching Polish assets in the United States. There are, however, virtually no Polish assets to be seized, and the court costs involved in such an effort may exceed the value of the property attached.
By not declaring default, we have created a situation today in which hard currency is flowing from Poland to the West rather than from the West to Poland. With Poland hard-pressed to repay its debt, the Soviet Union must transfer resources to Poland so the military government can maintain a standard of living necessary to ward off food riots, civil unrest, and the far greater economic problems that would be created by a Soviet occupation of Poland to restore "stability."
These actions come at a time when the Soviet economy itself is foundering. Already burdened by the inefficiencies inherent in its economic system, the Soviet Union is stumbling further under the weight of three successive poor harvests. The Soviet budget demands too much for the military and leaves too little for investment and consumer goods. Private market credit for the Soviet Union is drying up, and the agreement reached at the Versailles summit to handle financial relations with the Soviets cautiously--including the need for commercial prudence in limiting export credits --represents a first step toward ensuring that officially supported credits do not fill the gap created by private market withdrawal. These problems are reflected in the Soviet Union's deteriorating balance of payments, which in turn further complicates the domestic economic situation.
Declaration of a default on Polish debts would probably bring no more economic pressure on the Poles and the Soviets than currently exists. In fact, declaring a default now could ease their predicament. The Polish government could use a default declaration as an excuse for not paying even the small amounts that it is presently paying, leaving the Poles free to pay others who did not declare default. This would break the united front that we and our allies have maintained to date. The Polish government could blame the United States for its economic failures, and be driven exclusively to the Soviet Union for economic assistance.
Past U.S. efforts to apply sanctions, e.g., in response to the Soviet invasion of Afghanistan, demonstrate the inefficacy of the United States' acting alone. Nor should the United States bear all the burden. Any action taken should, to the extent possible, be multilateral In declaring a default, we would be asking our allies to take a major political and economic step. Their dependence on trade with Warsaw Pact countries is far greater than ours, and we must be sensitive to their internal political and economic pressures.
In addition, the possible secondary ramifications of a Polish default are also serious. While I have no doubt that the international financial and economic system would adjust to a Polish default, all of the consequences cannot be easily foreseen.
By not declaring a default, we preserve our options. The U.S. government already has the legal right in international and commercial law to declare Poland in default. The real question is should we do so now? While it is virtually impossible to define in advance the precise circumstances under which the United States would declare a default, it is clear that there are some. Not declaring default now does not deprive us of the right to declare a default in the future, yet it preserves the flexibility to lighten credit and foreign exchange pressure if future Polish and Soviet responses warrant.
We and the critics who are calling for declaration of a default share a common objective--to maximize the pressure on the Polish military government and the Kremlin to restore civilian rule and personal freedoms in Poland. However, declaring a default now is not the way to maximize that pressure.