PRESIDENT’S CERTIFICATION OF SOVIET CREDITWORTHINESS BLOWN AWAY BY PRIVATE U.S. AND WESTERN CREDIT MARKETS
(Washington, D.C.): Virtually
every major American and European
commercial bank has given lie to
President Bush’s recent contention that
the Soviet Union is creditworthy,
a precondition which legally must be met
by sovereign recipients of U.S.
agricultural export credit guarantees.
When the Bush Administration extended an
additional $1.5 billion in such taxpayer
guarantees to Moscow on 11 June 1991,
White House press spokesman Marlin
Fitzwater said: “The President has
discussed this with other experts and it
is his conclusion that [the Soviets] do
meet the test of creditworthiness and
that they can and will repay the
loans.”
Evidently, none of the
“experts” the President
consulted were people equipped with even
the most rudimentary knowledge of
sovereign risk analysis of the type
performed routinely by commercial bankers
and their economists in assessing Soviet
creditworthiness — or the lack thereof.
Indeed, in light of actual financial and
political conditions in the USSR, only
the most cynical and thoroughly
politicized process could have conjured
up a rationale for taxpayer-underwritten
pledges to Moscow now totaling $2.8
billion.
Recently published reports in the Washington
Post and the Journal of Commerce
lay bare the extent to which commercial
lenders have arrived at an altogether
different conclusion. In an article
published yesterday in the Post
entitled “Soviets Find Financing
Doesn’t Come Easy: Banks Reluctant to
Make Agriculture Loans, Despite U.S.
Guarantees,” it was revealed that
U.S. banks are simply unwilling to accept
shareholder exposure given the parlous
state of the Soviet economy:
“Although banks have been
increasingly wary about lending
to the Soviet Union, such
reluctance is unusual when it
comes to providing credits that
are largely protected by the U.S.
government and when such a small
portion of banks’ own money would
be at risk….“Under the $1.5 billion
agricultural credit guarantee, the
United States promises banks and
exporters that it would pay 98
percent of
the loans in the event of a
Soviet default. In addition, the
United States would make good 4.5
percentage points of interest on
that amount. That
leaves banks with relatively
little at risk: 2 percent of the
loan amount and the difference
between 4.5 percent and market
lending rates, equal to
about 4 percent to 5
percent.”
The Post quoted one executive
of a major money-center bank as saying,
“We wouldn’t want any more exposure
to the Soviets than we have now. We’re
not sure they are good for it.”
Another added, “There just
isn’t alot of enthusiasm for lending to
the Soviet Union.”
One of the reasons commercial lenders,
whose own money is on the line,
do not share the Bush Administration’s
enthusiasm for underwriting aid to the
USSR with taxpayer funds — is spelled
out by the Journal of Commerce.
In an article published in today’s
edition, Klaus Friedrich, the director of
the European section at the Institute of
International Finance, is quoted as
saying that, “Last spring,
banks could sell Soviet debt they held
into the secondary market for a few
percentage points below original value.
Now bankers would be lucky to get 60
cents on the
dollar.”
Indeed, traders of Soviet debt
contacted by the Center today indicated
that the secondary market would
actually be unlikely to pay more than fifty-cents
on the dollar, if that.
One offered the view that even this rate
was “headed south fast” and
could reach as low a level as
thirty-cents or less over the next few
months. Should Moscow’s trading level in
the secondary market fall to thirty-cents
to the dollar it would be financially
“devastating” for the Soviet
Union.
Other considerations prompting the
marketplace to take such a negative view
of Soviet creditworthiness are summarized
in an extraordinarily pessimistic
assessment of Soviet prospects released
in May 1991 by Salomon Brothers. Entitled
“The Soviet Union: Approaching
Crisis,” this report offers the
statistic evidence that underpins a
statement made yesterday by one of its
authors, Salomon Brothers’ country risk
expert John F.H. Purcell: “Nobody
will lend a single dollar into an obvious
[debt] rescheduling.”
Highlights of the report include the
following findings (emphasis added
throughout):
- “The Soviet Union’s looming
balance of payments difficulties
increase the likelihood of a
commercial bank loan rescheduling
in the near future.” - “The generally high regard
for the Soviet Union’s sovereign
credit was damaged severely in
1990….By April 1990, arrears
affected more than $2 billion in
credit, virtually cutting off all
new Western private credit to the
Soviet Union….(Soviet arrears
to Western suppliers are now
estimated by Salomon Brothers to
be as high as $10 billion.) - “The technical
debt-servicing problems that
dogged perceptions of Soviet
sovereign credit in 1990 will be
subordinate to the accelerating
deterioration of the Soviet
economy in 1991. Political
uncertainty and economic
collapse, combined with rapidly
increasing external debt over the
past five years, will initiate a
vicious circle in which the
Soviet Union will become totally
dependent on official sources to
finance its hard currency
shortfall.” - “[The estimates of the
December 1990 report on the
Soviet economy commissioned by
the G-7] already are widely
optimistic….In fact, our
projection of above 100% for
overall inflation in 1991 is a
minimum.” - “The current Government is
unwilling to undertake a radical
transition to a free-market
economy….” - “The virtual
disappearance of private
(commercial bank, bond issues and
corporate credit) financial flows
to Soviet entities…forced a
precipitous drop in Soviet hard
currency reserves of roughly $9.8
billion to a meager $4.9 billion
at December 1990.“ - “Only under the most
auspicious circumstances will the
Soviet Union avoid a balance
of payments crisis in 1991.
Under probable scenarios, it will
face financing gaps that equal or
exceed the country’s hard
currency assets. The Soviet Union
will have to take significant
steps to solicit even more
Western official support, allow
arrears to continue to accumulate
(thus endangering official flows)
or utilize a portion of its
gold reserves to meet the
potential gap. The
alternative is the unprecedented
step of rescheduling its
debt.”
The Center for Security Policy is not
surprised in the least by these dour —
but altogether realistic — judgments.
Indeed, it has been warning for over two
years(1)
that Soviet creditworthiness was
plummeting with the likelihood that, with
the consequent loss of access to the
West’s private credit markets, Moscow
would come to rely exclusively
on politicized, taxpayer-underwritten
assistance flows. To the extent
that the Soviet Union can obtain such
assistance without having first to
undertake systemic reforms, the Center
has long cautioned that the effect would
be to stave off — rather than promote —
structural political and economic
changes, changes in the vital interest of
both the Soviet people and the West.
Accordingly, the Center believes that
it is incumbent upon the Bush
Administration to impose conditions
like those contained in an
amendment adopted by a vote of 341-41 on
19 June 1991 by the U.S. House of
Representatives at the initiative of Rep.
Jon Kyl (R-AZ). If
enacted — with or without the
Administration’s support, the Kyl
Amendment would make wholesale political,
military and economic reform
preconditions for taxpayer-subsidized aid
to Moscow center. These conditions should
be embraced by the Bush Administration.
In addition, the Center urges that the
following steps be taken:
- Congressional hearings
should be urgently
held to examine whether the 11
June extension of $1.5 billion in
agricultural export guarantees to
the USSR is consistent with U.S.
law. Senator Bill
Bradley (D-NJ) and Sen. Pat Leahy
(D-VT), among others, have
suggested that — in view of the
Soviet Union’s poor credit rating
— such aid would violate the
pertinent statute. - In the meantime, there
should be no upward adjustment in
the percentage coverage of credit
guarantees (e.g., an
increase from 98% to 100%
government guarantees on the
principal and coverage of most —
if not all — of the associated
interest) in order to secure
commercial lenders’ underwriting
of the first $600 million tranche
of this $1.5 billion credit
guarantee package. - Congress should also take
steps at once to suspend action
on tranches two and three
of this agricultural credit deal
totaling $900 million. - The Bush Administration
should be dissuaded from
approving any further
taxpayer-guaranteed assistance to
the USSR now being contemplated.
Specifically, the Center
understands that as much as $3
billion in additional
Export-Import Bank loan
guarantees that would provide
large-scale and unconditioned
assistance to the strategic
Soviet energy sector may be in
the offing once the $300 million
limit imposed by the Stevenson
Amendment is removed. - Such aid is largely intended to
revitalize and expand Soviet oil
production. It is likely,
however, to produce revenues
which Moscow center can apply to
whatever purposes it chooses —
including military expenditures,
foreign aid to client states like
Cuba, and foreign and domestic
political activities inimical to
Western interests. The
Center believes a massive,
multilateral infusion of
assistance to this key sector of
the Soviet economy is the
“stealth” agenda item
for the London Economic Summit.
Such an initiative should be
strenuously resisted.
“Private Western creditors,
including U.S. banks, have flatly
repudiated the Bush Administration’s
assertions concerning Soviet
creditworthiness,” said Roger W.
Robinson, Jr., former Senior Director for
International Economic Affairs at the
National Security Council and member of
the Center’s Board of Advisors. “How
does the President intend to explain to
the Congress and the American people that
U.S. banks are unwilling to carry even
two percent of Soviet credit risk on
their books, while U.S. taxpayers have
been compelled to assume responsibility
for 98 percent of billions of dollars in
the form of guarantees?”
Robinson added, “If the Secretary
of Agriculture and the Administrator of
the Commodity Credit Corporation permit
themselves to be strong-armed by the
White House into expanding U.S. taxpayer
guarantee coverage for grain sales to the
USSR, in the face of such clear-cut
credit indicators of future multi-billion
dollar losses for the American people,
then the Congress should see to it that
such a politically-motivated action is
CCC’s last as an official entity.”
– 30 –
1. See,
for example, Trade with the
Soviet Union: Country Risks and Global
Markets
89-T13, 3 October 1989)
European Economic Relations: A Risk
Assessment
1990);
Bail-Out of Soviet Cash Crunch by Western
Central Banks? A Bridge Loan to Nowhere
90-P56, 12 June 1990)
Lips: ‘No U.S. Taxpayer Aid to Gorbachev’
90-63, 3 July 1990)
Moscow Plays Favorites in Payments to
Western Creditors
(No. 90-P71, 30 July 1990)
Verse: Center Warnings Confirmed as
Soviet Deadbeats Endanger U.S. Firms
91-P19, 12 March 1991)
Wants to Break Our Bank: No Credit Where
Credit is Not Due
91-P35, 1 May 1991)
Against “Grand Bargain”
91-P52, 18 June 1991)
Your Hand’: Gorbachev Letter Reveals
Shakedown Scheme; G-7 Forewarned,
Forearmed?
91-P54, 25 June 1991)
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