Salvaging the Debts of Eastern Europe

SO MUCH emphasis has been laid on the three billions or more of American investments and advances tied up in Germany that little consideration has as yet been given the fate of $650,000,000 of American money poured into the states of Eastern Europe during the years 1920-1931. Five of these eight states have bonds listed on the New York Stock Exchange which are in partial or total default due to local regulations prohibiting payments on foreign debts except in local currency -- namely, Austria, Bulgaria, Greece, Hungary and Jugoslavia. The finances of these five countries, and of Rumania, Czechoslovakia and Poland, have been passing through a series of severe crises. The first five, together with Rumania, rigidly control their foreign exchange operations. Even Czechoslovakia, whose foreign debt is insignificant, has had to fight to safeguard its currency and to keep its financial house in order.

Of the $650,000,000 of American money tied up in this region about $50,000,000 is in short-term loans. Most of this is in Hungary and Austria. The balance, consisting chiefly of long-term indebtedness, both corporate and governmental, was divided as follows at the end of 1930, and has probably been only slightly reduced since that date by repatriation:

How much, if anything, of this $650,000,000 can be salvaged and how best can the salvaging operation be carried out?

In estimating the probable ultimate capacity of these countries to pay their foreign debts we must ascertain the following facts for each: 1. What proportion of its indebtedness is due foreigners? 2. What is the total volume of its foreign debt? 3. What is the relation of its debt service charges to its capacity to transfer payments abroad? 4. What has been the history of its foreign trade, especially regarding its ability to establish a surplus of exports over imports?

Figures showing the ratio of foreign to domestic non-governmental borrowings are not obtainable. However, the following table, showing the percentage of government debts held abroad, probably reflects correctly the ratio in the case of general indebtedness, for the reason that in Eastern Europe the amount of capital available for domestic investment is small.

It is obvious that not only have foreigners provided the major part of the funds to finance the governments of these countries, but that the failure of five of the governments in question to maintain the service charges on their debts has been a blow to foreign creditors more than to domestic creditors. The debt problem is therefore of primary concern to foreign nations.

Let us now consider the volume of indebtedness of these nations. The following table shows in one column the total external debt of each in millions of gold dollars, including public and private debts, both long-term and short-term, and in column two the per capita debt in gold dollars.

The foregoing table, adapted from the preliminary report on the Stresa Conference published by the League of Nations,^[i] shows that, although Rumania has the largest total debt, with Poland second and Hungary third, Hungary comes first on a per capita debt basis, with Greece second and Austria third. The per capita figures are a truer gauge of the comparative debt burden of the nations than are the bare totals.

Payments on debts can be made, theoretically, in four ways: in gold or foreign exchange; by a surplus of exports over imports; by services, shipping, insurance, tourist expenditures, immigrant remittances, etc.; by fresh borrowing or reinvestment. In actual practice, payment is usually made by a combination of these four methods.

Let us consider the present situation of the countries of Central and Eastern Europe with regard to these four methods of paying debts. We see in the first place that none of the nations in question has a surplus of gold or foreign exchange. Secondly, none of them renders services which bring in a large enough revenue to be of material assistance in paying debts. Only Austria and Greece count on substantial receipts from the tourist trade. Immigrant remittances to all of these nations except Greece have fallen off so sharply that they no longer are an important factor in the balance of international payments. In the third place, none of the nations, with the possible exception of Czechoslovakia, is likely to be able to borrow substantial sums abroad for a number of years. The prospects of reinvestment remain to be studied and may prove valuable to foreign creditors.

The Report of the Stresa Conference points out that the ratio of a nation's foreign debt service charges to the value of its exports is a measure of the burden of its foreign debts. Taking the average value of the exports of these countries for the years 1929, 1930 and 1931 as a measure, we find that the ratio of the present external debt service to exports is as follows:

A glance at this table shows that all the nations must export more than they import in order to pay the service charges on their foreign debts. In the case of Hungary and Greece, they must in theory export a third more than they import.

What is the record of the balance of trade of the different states over the past decade?

Austria and Greece have had a persistently adverse balance of trade.

Bulgaria's balance has been adverse in seven out of ten years, Hungary's has been adverse in eight out of ten years, Poland's has been adverse in six out of ten years.

The balances of trade of Rumania and Jugoslavia have shown greater fluctuations. Rumania's has been favorable in six years and adverse in four. Jugoslavia's has been favorable in five years and unfavorable in five years.

Czechoslovakia alone has had a persistently favorable balance of trade.

It is noteworthy that both Rumania and Poland in the year 1931 had a favorable balance of trade almost equal to the total service of their external debts. Czechoslovakia more than covered her debt service by her surplus of trade.

The fundamental factor in a favorable balance of trade, of course, is a nation's capacity to produce goods which other nations will buy -- to produce them cheaply and in substantial volume. In this respect, Rumania, Poland and Jugoslavia, even though heavily indebted, are in a favorable situation, as they have more abundant natural resources than either Hungary or Greece and are less dependent than either of those two nations on other countries for essential imports. Poland has its surplus of good coal, and Rumania has its oil to sell. Furthermore, the internal purchasing power in those two countries and in Jugoslavia and Bulgaria is very low. That means that any great increase in the demand for imported articles is unlikely in these countries, with the result that those of them which have exportable raw materials should find it less difficult to maintain a favorable balance of trade than would Hungary, which has only agricultural resources. In this respect Austria is at an even greater disadvantage than Hungary, as she is largely dependent on foreign sources for essential raw materials with which to carry on her industries. Austria's exports consist mainly of articles manufactured, usually with imported coal, out of imported materials. It therefore is more difficult for her than for other nations of the group, with the exception of Hungary and Greece, to substitute a surplus of exports for a surplus of imports. This is one reason why the comparatively large debt of Austria is a serious handicap to that country, even though the ratio of the debt service to exports is not excessive.

It has frequently been asserted in the debtor countries that the capacity to pay debts depends on an increase in world prices. This assertion should be accepted only with reservations. It of course is true that an increase in world prices will materially raise the receipts from exports; but it will also increase the cost of imports. In other words, the real problem is not so much to increase the revenues from exports as it is to increase the surplus of exports over imports.

This problem is already receiving the attention of the governments of the different countries in question, as well as of the Great Powers. But it is complicated by political factors. As has been shown by Mr. Armstrong,^[i] the Danubian states already export to each other about as much as they can absorb. If an outlet is to be found for their surplus products it must be found in Germany, Italy, and perhaps Switzerland. Unfortunately, the French for some time opposed all efforts to establish closer trade relations between the Danubian states and Italy and Germany. There are signs now that this opposition may be withdrawn, at least in so far as Italy is concerned. But a further complication arises from the fact that the United States, Argentina, Canada, and Australia are reluctant to see any arrangements made which will facilitate the export of grains from the Danubian states to Germany and Italy at the expense of overseas grain. An arrangement regarding wheat has been worked out at the London Conference; but the existence of the most-favored-nation clause presents a constant obstacle in the way of other similar arrangements, as whatever advantages they might hold would largely be nullified if the agreements were general rather than preferential.

There is a real conflict of interests, then, between those who wish to sell goods abroad and those who want to collect debts. And this conflict further complicates the problem which we are discussing. American producers, whether industrial or agricultural, are naturally more interested in selling their surplus abroad and preventing dumping by foreign nations than they are in seeing American investors and bankers recover their loans. This produces divided counsels at home, and so makes the American Government even more reluctant than usual to help the creditors.

An unexpected form of relief for the debtor nations has been furnished by the departure of the creditor nations from the gold standard. Acceptance of the principle that dollar bonds are not payable in gold but only in dollars has already reduced the debt burden of our debtors by about a third. If the inflationists have their way in this country and depreciate the dollar still further, the foreign creditors of the United States will benefit still further. Furthermore, should they follow the example which we have set them, should they make a unilateral decision that payments can only be made in their own paper currency, and then depreciate that currency still further, they may succeed in paying off most of their debts on an even more reduced basis.

Let us now turn from the situation of the debtors to that of the creditors. Obviously, the problem of protecting the interests of the latter in Eastern Europe is particularly difficult because the creditors not only are divided among several nationalities, but because there are conflicting interests between different classes of creditors as well as rivalries within each national group. Speaking generally, about two-thirds of the long-term loans made to the nations of Eastern Europe came in about equal proportions out of British and American savings. The remaining third was furnished by investors in Sweden, France, Holland and Switzerland. In the case of the short-term advances, a larger share came from France -- presumably because of political advantages attaching to emergency short-term help.

In theory, the Finance Committee of the League of Nations furnishes the appropriate channel for dealing with the problem presented by the debts which we have been considering. And as a matter of fact, the League has appointed financial advisers for Austria, Hungary, and Bulgaria, and has facilitated investigations of the financial conditions of Rumania and Greece. The men chosen for these various tasks have shown exceptional ability. But their work has been confined to supervision of budgetary and financial matters. They have not been empowered to speak for the creditors and, contrary to a statement occasionally heard in Europe and America, they are not charged with the primary purpose of protecting the loans made under the auspices of the League of Nations.

As a matter of fact, the main criticism directed against them and against the Finance Committee has been that the League has not allowed them to take enough responsibility. This is probably due to an understandable desire on the part of the Finance Committee to avoid becoming implicated in the cross-currents of European politics. A way of overcoming this difficulty might be for the Finance Committee, in conjunction with the Bank for International Settlements, to appoint a committee representing the principal creditor nations and to lay before that committee all available information on the financial and economic status of the debtor nations. This committee, after careful investigation and after consultation with the Finance Committee and the Bank for International Settlements, could then recommend the course of action to be followed in the case of the separate debtor nations.

Presumably, the representative of each creditor nation would have the confidence of the individual creditors in his country and could discuss with them the nature of any general proposal made for the reorganization of the indebtedness of the various debtor countries. In England, he would probably work with the Corporation of Foreign Bondholders. In France he would work with the Association Nationale des Porteurs Français de Valeurs Mobilières. In America, failing the eventual creation of an authoritative organization representing the interest of the bondholders, he could work with a committee chosen by the principal houses of issue. It would also be necessary for the representatives of the different nations to be themselves in contact with the groups already organized to defend the interests of the short-term creditors.

With the exception of the standstill committees appointed to consider the short-term debts, the creditors have until now acted more or less independently. The national groups have done little to coöperate with each other. The representatives of long-term and short-term interests have not coördinated their plans. The resulting disorganization has helped dishonest debtors and dishonest creditors alike. If there is to be fair play for all, and if common sense is to be applied to the problem of recovering as much as possible of the foreign debts owed by Central and Eastern Europe, the creditors must coöperate in working out a plan which is fair to different classes of creditors and which at the same time gives the debtor nations a chance to recover.

^[i] League of Nations, C. 666. M. 321. 1932. VII.

^[i] "Danubia: Relief or Ruin," by Hamilton Fish Armstrong, FOREIGN AFFAIRS, Vol. 10, No. 4.