Western Nations Reward Poland by Halving Its Debt

WASHINGTON —  In an effort to reward Poland’s dramatic efforts to embrace democracy and a free-market economy, the United States and other Western nations have agreed to forgive half of Warsaw’s massive foreign debt, U.S. and European officials announced Friday.

The move to wipe out 50% of Poland’s $30.8 billion in debt to Western governments should help breathe life into the Poles’ struggling economy, which so far has foundered in response to radical reform measures designed to accelerate the move from communism to a free-market system.

“If Poland continues to carry out its economic reforms, this package of debt forgiveness should help to foster economic growth in Poland,” said David Mulford, undersecretary of the Treasury for international affairs and a key player in the debt negotiations.

The United States led the effort to persuade other nations--particularly Germany, France and Japan--to agree to cut Poland’s debt burden, according to U.S. officials and private economists familiar with the negotiations.

The United States, which is owed roughly $3 billion by Poland, is widely expected to go even farther than Friday’s agreement by forgiving as much as 80% of that debt, about $2.4 billion. The Bush Administration may announce such a move in the next few days in anticipation of next week’s visit to Washington by Polish President Lech Walesa.

Mulford acknowledged that the Administration is likely to go beyond the 50% debt-forgiveness level, but he declined to provide details.

Other sources, however, said the Administration may use Walesa’s visit as an opportunity to announce a unique debt-swap arrangement under which Poland would be able to finance efforts to clean up its fouled environment and upgrade its roads and other essential services.

Economists said Friday’s agreement represents a turning point in relations between the West and the world’s poorer, debtor nations. It marks the first time that Western nations have agreed to reduce the debt that they are owed by a country as modern and industrialized as Poland.

In fact, some economists warned that the deal could set a precedent under which other debtor nations will demand that their loans be renegotiated as well.

But U.S. officials insisted that Poland represents a special situation, both because of the enormous size of its debt burden and its ambitious efforts at political and economic reform.

Noting that Poland’s debt was piled up by the previous Communist regime, Mulford said the loans should not be allowed to remain a major obstacle as the newly democratic country tries to move to a more open society and market-oriented economy.

Indeed, much of the debt arose in the 1970s as Poland’s Communist government sought to finance big, clumsy, state-owned industrial projects. It also used borrowed funds to buy expensive imports to placate restive consumers.

“Poland is a special case,” Mulford said. “These are debts that were brought on by a government that was imposed on Poland. This is not a precedent for other nations.”

Still, even Mulford acknowledged that similar debt-forgiveness talks are under way on behalf of Egypt, a key player in the Persian Gulf coalition.

Poland had been demanding that the West forgive 80% of its debt, but many European nations involved in the talks initially rejected any proposal to cut the nation’s obligations at all. For some European nations, it was a far more important matter than it was to the United States; for example, Germany--Poland’s largest creditor--is owed roughly $9 billion.

The United States, concerned that Poland’s political stability would be undermined if the West did not ease up on its economic demands, eventually pushed both sides toward the middle, with a compromise reached at halving the debt.

“I think it is a great step forward for Poland and a great victory for American foreign policy,” said Jeffrey Sachs, an economist at Harvard University and a key economic adviser to the Polish government.