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Rate Hikes Feeding Eastern Europe’s Debt Woes

From Reuters

The Organization for Economic Cooperation and Development warned Wednesday that increasing debt by Eastern European countries could bring payment problems if the rise in world interest rates continues.

The OECD said in a report that interest payments on debt by the Soviet Union and other Warsaw Pact nations had been inching up since 1986.

Some, if faced with a halt in new lending from non-communist industrial nations, would lay themselves open to balance of payments problems.

“For the region as a whole, the current situation may be considered to be comparable to the situation prevailing in 1981, the year of the onset of the debt crisis,” the OECD said.

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Of the seven East Bloc nations, East Germany and Romania were in stronger positions than in 1981, while Bulgaria and Hungary were weaker.

Higher Indebtedness

In overall terms, Eastern Europe by the end of last year had hard-currency debt of $129 billion, up from a low of $82 billion in 1984.

The report warned: “If, as appears possible, the region is moving toward a pattern of higher indebtedness, the sensitivity of individual countries to rises in interest rates will be greater.”

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Hungary, for example, must run a surplus of $1 billion in hard currency business to service debts and keep its current account of merchandise trade and services in balance.

By 1987, only East Germany, the Soviet Union and Romania appeared able to withstand a severe loss of market confidence in their debt without having to slash imports.


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