The Eastern European countries liberalised their trade and credit relations with the West in the early 1970s, the first period of detente in East-West relations. During one decade they contracted a massive debt to the West and in 1981 Poland and Romania announced their inability to service the external debt, and Hungary and the GDR experienced a serious liquidity crisis. Bulgaria also experienced liquidity difficulties in 1978-9. The accumulation of debt continued during the 1980s. The question arises whether the convertible currency debt will be inherent in the economic development of Eastern Europe in the next decade, considered to be the second period of detente in East-West relations? This chapter discusses the impact of the economic reforms on the CMEA external balance and creditworthiness and likely developments in the medium and long term.

Economic reform and the external balance

The Hungarian economist B. Csikos-Nagy remarked more than fifteen years ago (1974) that a ‘deficit balance of the Eastern European nations seems to be a constant phenomenon of the East-West economic relations’. Will this statement be valid also in the 1990s?

Foreign borrowing can be considered as a trade across time, for external financial problems cannot be solved without trade. On the other hand debt servicing capacity must be judged on long-term economic growth prospects rather than on a net debt level. The international borrowing and repayment of debt of the Eastern European countries is related to a two-gap problem: the first gap is the savings-investment gap (that between income produced and income absorbed; the increase in foreign borrowing when income absorbed exceeds income produced) and the second gap is that between current account payments and receipts.