Reagan's No-Default Policy

The U.S. decides not to declare Poland bankrupt—yet

When a private borrower cannot pay back a U.S. Government guaranteed loan, he is declared in default. His credit rating and his good name are ruined. But when the debtor is another nation, especially a sensitive case like Poland, life is more complicated. Amid much internal debate and controversy, the Administration agreed to pay $71 million in January installments on money borrowed by Poland to finance grain purchases, deferring for now the option of declaring the military regime in default.

Allowing Warsaw and its overbearing Soviet sponsors to avoid the real and symbolic consequences of bankruptcy made it seem that the Administration was not willing to back up with substantive, tough action its tough talk about punishing those responsible for last December's military crackdown. Poland is clearly bankrupt; there is no way it can meet all of the interest payments on its outstanding $28 billion debt to Western nations and banks. With a public declaration of default, hard-liners argue, the credit of all Communist countries would be justifiably jeopardized and the failures of their economic systems exposed. In addition, refusing to keep Poland solvent would squarely place the burden of that country's economy on Soviet shoulders, and Moscow would have to come up with the capital to continue its client's survival.

Defense Secretary Caspar Weinberger, one of the Administration's principal proponents of declaring default, has reportedly argued that increasing the credit burden on Moscow might slow construction of a proposed $15 billion natural-gas pipeline from the Soviet Union to Western Europe. The U.S. is anxious to scuttle the pipeline because it would make Western Europe dependent on the U.S.S.R. for vital energy.

At the Treasury and State Departments, however, officials argue that there is nothing to be gained at the moment by declaring default. The current payments merely continue the process, which was begun last year, of rescheduling Poland's debt obligations. The U.S. action does not relieve Warsaw of the duty to pay the money eventually. The Poles are currently not being allowed to borrow more, nor do they have enough assets that could be seized to cover their debt. Poland is at least attempting to pay off some of its interest obligations to private Western banks, and has met close to $350 million in payments, out of $500 million owed in 1981. As Secretary of State Alexander Haig told the Senate Foreign Relations Committee last week, "Had we called default, Poland would have been relieved of that burden."