Now It's Cash-Strapped Rumania

By John S. DeMott

The East bloc gives the West a new worry

As Western banks and governments are discovering, collecting overdue loans from Eastern European countries is an exercise in smothering fires that never quite die. Not only is the Polish government broke and in debt to Western creditors for upwards of $28 billion, but all of a sudden the Communist bloc has produced another potential billion-dollar deadbeat: Rumania.

With 22 million people, a reputation in better days for being the breadbasket of the Balkans, and a land area about the size of Oregon, Rumania has survived everything from occupation by Roman legions to the murderous 15th century excesses of Prince Vlad Tepes, widely thought by scholars to be the real-life model for Count Dracula of Transylvania, fiction's most famous vampire.

Nowadays Rumanian citizens must contend with food shortages, long lines in shops and a sliding economy that the country's President, Nicolae Ceausescu, seems ill equipped to reverse. Ceausescu has vowed, among other gestures, to jail anyone feeding bread to animals.

The country's newest yoke is high external debt--upwards of $10 billion--and it is weighing heavily. Two weeks ago, after a patient wait of about two months, European American Bank finally asked the U.S. Commodity Credit Corporation to make good on an overdue installment of $5.5 million on a loan obtained by Rumania to buy U.S. farm products. Earlier, First Chicago International had made a similar claim for $300,000. As initial guarantor of the loans, the CCC had to pay off.

The nonpayment and resulting hasty bailout caught State Department officials off guard. No mention had been made of this possibility when Secretary of State Alexander Haig visited Rumania earlier in February. Now Washington officials are beginning to wonder whether Rumania will be able to meet payments on the billions of dollars more that it owes to commercial banks round the world. Almost half of Rumania's debt load is in the form of short-term loans that must be either rolled over or paid in less than a year.

Though Washington understandably wants its loans repaid, none of the U.S.'s 14 multinational banks that have lent funds to Rumania is anxious to see the country declared in default. Rumania's repayment record has been steadily deteriorating in recent years, but default could serve mainly to drive Rumania closer to Moscow, diluting CeauS:escu's longtime role as an independent voice in East bloc foreign affairs. For now, about all Washington can do is refuse new credits, and that it has done. As a way of keeping up pressure for payments of existing debt, Ronald Reagan declined to award $65 million in new agricultural credits.

Some sort of repayment scheme may be announced this week. A group of international bankers, led by New York's Manufacturers Hanover Trust, Bank of America and First Chicago International and representing 13 private creditors, has been in Bucharest to talk things over. That in itself is a little unusual: the negotiators are acting unilaterally and without the formal consent of more than 200 other Western banks that are also owed money by Rumania. Moreover, the objective of the talks is to reschedule Rumania's private debt before taking up the problem of its debts to foreign governments. By contrast, negotiations over the Polish debt question focused first on how loans to governments would be paid back.

Of immediate concern in the Rumanian tangle is some $1 billion hi debt-service payments due between now and April 1. The negotiators are hoping in effect to hammer out a rescheduling deal and then present it as virtually a feit accompli to the other Rumanian creditors.

Collectively, U.S. banks are not owed suffocating amounts by Rumania. Manufacturers Hanover has lent Rumania an estimated $200 million, the Bank of America and First Chicago International are owed about $100 million each, and other U.S. lenders are owed smaller amounts. In contrast, banks in France and Britain are owed about a third of Rumania's commercial debt, the International Monetary Fund is owed $590 million and the World Bank $945 million.

Rumania got in debt for much the same reasons as other East bloc countries: overly ambitious industrialization programs, borrowing to cover higher and higher oil prices during the 1970s, then not being able to cover those debts because of plunging exports and shrinking reserves of hard currency. The country added to its debt woes by borrowing for ill-advised industrialization projects. Huge petrochemical complexes, built mainly for glamour, go unused because the Rumanians cannot afford the oil to feed them. Such projects steered resources away from agriculture, the mainstay of the Rumanian economy, thereby aggravating the country's food-import headaches.

The Soviets are not in any position to help Rumania climb out of its financial hole, even if they wanted to help. The U.S.S.R. has drawn from its Eurodollar accounts to help Poland and is having trouble raising additional funds from private financing sources in the West. Meanwhile, the price of gold, a principal Soviet monetary reserve, has dropped by nearly 70% in the past two years, and the value of oil, another leading Soviet export commodity, is slipping.

With Poland and Rumania already shaky, the rest of Eastern Europe cannot be far behind. Says Rimmer de Vries, Morgan Guaranty Trust's chief international economist: "It's the domino effect. None of the East bloc countries is well managed. There is simply not enough coordination." Headed for severe lending problems are East Germany and Hungary. That would place the East bloc on deadbeat status, owing principal and interest on socialist economic systems that for one reason or another have not delivered the goods for their people. --By John S. DeMott.

Reported by Gisela Bolte/Washington and Bruce van Voorst/New York

With reporting by Gisela Bolte, BRUCE VAN VOORST

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