Part I: Introduction-Developments from 1989 to 1990 The table below highlights some of the issues this paperis seeking to folow upon.Clearly 1990 was the year of greatest uncertainty, with _negative transfers_ (or at best zero, in the case of Poland) _to commercial banks from all countries in the region._ The picture has changed in 1991, as shown in subsequent tables in this paper.

It is widely accepted that few if any sovereign debtors in the rgion are likely to have access to general purpose commeicial bank funding in the next five years. At the same time, the table below supports the anecdotal evidence that there are some private capital iinflows, especially for Hungary, Czechoslovakia and Poland. The paper will examine the size and creditor composition of funds flowing to the region since 1989. In particular, it will examine the types of financial instruments which are being used to channel _private sector fiuds,_ such as short term trade lines, project financing, equity investments in joint ventures, syndicated loans, offsets and countertrade etc. The implications for relative seniority of post-1989 _commercial inflows_ wifl be of great interest in this context, and efforts have been made to learn about collateral or guarantees extended to investors in financing projects.

foreign investment (DFI). This is of course also related to the sovereign government's direct market access to borrowing for balance of payments support. Earlier findings have showu that the sovereign govermment borrowing rate usually sets a benchmark, and that the cost of funds for enterprises is heavily influenced by sovereign risk.<sup>3</sup> Private sector flows will set the tone for the relative ease of future access to all international capital flows.

# A. The Soviet Umbrella, or a Different Set of Rules for the Region in the 1980s?

Under the old CMEA arrangements, it was a common assumption among western bankers that the USSR would notpermititsalliestodefaultonhard-currencyobligations, and that in effect loans to the region were implicitly backed by Soviet gold reserves in a worst-case scenario. This, together with a solid track record of prompt and timely debt servicing, explains why the region was still able to attact hard currency on very favorable terms throughou **t** he 1980s when banks were already facing the reality of insolvent debtors with similar debt ratios elsewhere in the world.

The term "financial market access" is extended in this paper to include the ability of the _enterprise sector_ to raise funds in the capital markets e.g suppliers'credits and direct Both Hungary and Poland had debt/GDP ratios higher than Brazil's, for examnple. In fact, Hungary was quite comparable to Mexico and Argentina in terms of debt/ _Table 1:_ Private Commercial Finance and Relative Indebtedness **at** the Turning Point in CEE (in US$ million)

||Bul|garia|Czech|oslovaki|a<br>Hu|ngary|Po|land|Rom|ania|
|---|---|---|---|---|---|---|---|---|---|---|
||1989|1990|1989|1990|1989|1990|<br>1989|1990|1989|1990|
|Commercial<br>Banks,<br>net credit flows|1,114|203|783|-271|_529_|-1,670|<br>-388|0|-281|-6|
|Commercial Banks,|0|294|0|0|0|0|145|796|0|0|
|interest arrears outst.|||||||||||
|Other private creditors,<br>net credit flows|675|-140|-189|221|818|677|-287|103|-47|-52|
|Equity Investment.<br>net Flows|0|5|26|50|180|337|15|10|0|0|
|Extenal Debt to<br>commercial Banks|7,256|8,223|5,648|5,349|13,269|12,642|<br>8,580|10,627|248|252|
|MLT Extenal Debt to<br>commercial Banks|4,924|5,057|2795|3,120|10,574|10,981|<br>7,360|8,386|1|0|
|Total External Debt|10,224|11,030|8,183|8,085|20,537|21,481|41,387|49,019|582|518|
|DOD/Total Exports|252.7|329A|112.4|102|241.4|236.9|474.4|383.8|8.7|12.8|
|Percent of Total External<br>Debt in US$|52.3|52.3|30.6|26.8|23.8|22.3|31.7|37.2|69.2|60.3|

Source: Staff estimates based on Country Repous of dhe Insiute of Intemational Finance (RF) dated November 91 through January 1992 3. Successive bond issues by Mexican public enterprises in 1990 were reportedly carried out as part of a strategy to buildon a consistently solid track record for bond debt payments and to demonstrate the increasingly improved tenis for borrowers-the yields fell from 17% in June 1989 to 11% in September 1990. Foreign borrowing authorities in the Mexican govermment reportedly consider these as benchmark rates which are intended to support the Mexican private sector's reentry into the international capital makets.

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