$5 billion mystery in East Germany

There's a financial mystery that has been discussed at length here in the Economics Ministry and other ministries: Why is East Germany piling up such large monetary reserves of hard currency? The leaders of the German Democratic Republic (DDR) have not divulged their motives for accumulating, as of the end of last year, more than $5 billion in United States dollars, West German deutsche marks, and other Western currencies. So economists here and elsewhere must don their best Sherlock Holmes deerstalker caps and surmise the motives of the communist leaders.

What makes the development especially mystifying is that East Germany, despite a balance-of-payments surplus with the West, has been borrowing heavily to build up these reserves.

That's dandy with the capitalists in London, New York, and other financial centers. At this point, East Germany is considered an excellent credit risk.

``Money is almost being forced on them [East Germany],'' says Jan Vanous, research director for PlanEcon Inc., a Washington firm specializing in research on the economies of the Soviet Union and Eastern Europe. Compared with Latin American debtor countries, the DDR is considered an excellent credit risk.

Early in June, for example, a consortium of banks led by Arab Banking Corporation, First National Bank of Chicago, and Industrial Bank of Japan raised $600 million in credits for East Germany. That was triple the amount originally sought.

East Germany's surplus in its hard-currency accounts with noncommunist countries last year amounted to around $1 billion. Clearly the DDR doesn't have to borrow. Indeed, according to estimates of Mr. Vanous, East Germany managed to reduce its gross hard-currency debt from around $12.6 billion at the end of 1983 to $12.3 billion at the end of 1984. Its net hard-currency debt (after subtracting hard-currency assets, such as reserves and loans to developing countries) sank from $9 billion to $7.3 billion.

That represents fast progress in reducing the debt burden.

So why borrow?

The most common explanation of the experts is that East German Communist Party chief Erich Honecker wants large reserves as insulation against the possibility of another debt crisis.

The East European nations had started to borrow more or less heavily in the West after the Soviet Union boosted the price of the oil it was shipping to them in the late 1970s and earlier part of this decade. Through borrowing, East European leaders hoped to avoid a politically hazardous decline in their people's standards of living. They also intended to acquire the Western technology that could speed their economic progress. But when Poland was unable to make payments on its Western debts in 1981, the re was an almost immediate fallout on its Comecon trading partners. East Germany, Hungary, Romania, Hungary, and Bulgaria found them selves suddenly cut off from Western credit.

A Vienna research institute report on East Germany's debt situation was an especially hard blow.

Speaking of the 1981 debt crisis for East Germany, Dr. Heinrich Vogel, director of research at the Federal Institute for East European and International Studies in nearby Cologne, recalled: ``It was an absolutely new and frightening experience for them [East German leaders]. They realized they were part of a larger and more dangerous game. They had thought they were in a different class than the developing nations.''

Contrary to what many Western financiers had reckoned, the Soviet Union did not come to the financial rescue of its satellites. Nor were East Germany's Comecon allies in any shape to help.

The only solution to the credit crunch for East Germany was its own actions (it cut back sharply on imports and pushed exports) -- and financial assistance from West Germany.

Embarrassingly, the chief proponent of the aid was Franz Josef Strauss, the conservative Bavarian politician who has always been something of a b^ete noir for the communists in East Berlin. Despite this political taint and an interest rate that was not cheap (1 percent above LIBOR, or London Interbank Rate), in 1983 the DDR accepted the 1 billion deutsche mark loan (around $340 million at the current exchange rate).

Officially there were no other conditions attached to the money. But as Mr. Vogel noted, within the next 14 to 15 months the East Germany allowed some 40,000 of its citizens to leave the walled-in nation.

Money, said Vogel, ``is our lever, and we use it.''

East Germany, according to Vogel and other experts, does not want to get into this ``mess'' again where it can be blackmailed politically. So it is buying insurance in the form of reserves.

There are other things that may add to the desire of the East German leaders to boost their financial independence.

One, says a government specialist on East Germany here, is pressure from the Soviet Union. It doesn't like its East European satellites to be too beholden to the West. (Some also contend that more financial strength will give East Germany greater flexibility in dealing with the Soviet Union.)

Another reason for building up reserves is that this increases the DDR's credit rating.

``They want to reestablish their credit standing as one of the most conservative debtors in this shaky world of financial flows,'' says Vogel. ``They take great pains to service their debts.''

A third element in the decision is that the East Germans are paying cash for much of their imports, rather than using export credits as in the past.

Further, the net cost of borrowing money (the equivalent of around $2 billion within the past 12 months) to add to reserves is rather small. The borrowed money can be lent out again at interest rates that are either not much lower than the rate the DDR is charged or that perhaps even offer a small profit.

These are, of course, just ``educated guesses'' as to East German motives, based on available evidence. Nonetheless, as one analyst said, ``They make sense.'' Or as Holmes would say, ``Elementary, my dear Watson.''