statutory capital of firms established with foreign participation was US$4.4 billion, a third of which was invested by foreign participants. So far no data are available on the exact geographical distribution of the foreign investors, but Germany, Austriaand USApreserved theirlead in the numberof joint ventures set up. USA continues to rank fist according to the total value of investments. According to NBH only US$20 million was transferred from Hungary in repatriation of profit in the first six months of 1991.10 expected for sovereign issues (i.e. borrowing wherever they can).

Wester commercial banks were far more eager to discuss their impressions of the newly forming _commercial banking sector_ in each of these countries, which they believe is an important prior step to managing foreign borrowings in any strategic way in future.

# _Institutional Setup-Domestic Commercial Banks_

In Hungary, foreign investments in the form of non-cash contributions are classified as imports. In paricular, import data includes contribution in-kind by foreign investors to the statutory capital of newly set up joint ventures, deliveries under leasing agreements, repayment of earlier Hungarian credits to the Soviet Union by gas shipments from the Yamburg pipeline, etc. According to the Finance Ministry, this came to about US$550 million in the first seven months of 1991 this year. CSFR is the only othercountry in the region with active interest on the part of foreigners in joint ventures.

Throughou **t** heregion, previously the State Bankactedas bothacentralbankandacommercialbank,receivingsavings from private citizens (channeled to it through the savings banks) and passing them on to specialized sectoral credit banks. These credits were granted in the framework of a "centralcreditplan"butnosanctionswereappliedincase the credit remained unpaid. The credit would simply be transformed into a subsidy.

This load of bad credit portfolios is in the very early stages of cleanup at present, and is compounded by the general problem of insufficiently capitalized banks. The political of selling these banks to foreigners was noted by westem bankers, but all felt that this was the only solution, since the banks in question would not be able to raise capital on the international markets for many years.

# F. Institutional Setup-How is the Borrowing Managed **Institutional** DifferentCounowries? theBorrsensitivity **aged in Different Countries?**

Under the previous regimes, convertible currency borrowing requirements were set administratively and incorporated into the State Currency Plan. The Foreign Trade Bank was the authorized bonrowing arn of the Government and wouldcarryouttherequiredtransaction,withoutanyinputor participation in a borrowing strategy. Bankers _stated_ that the "Soviet umbrella effect", i.e. the markets' belief that e USSR would bail out its allies rather than allowing them to defaulton western obligations, accounts fora large partof the access on favored terms for the various Foreign Trade Banks through the 1970s and 1980s. The most important reason of course is the prompt and timely commercial debt servicing record for the region as a whole prior to 1989.

In this system, no sophisticated qualifications were required for bankers, who were predominantly officers of the same kind as in the ministries. This lack of experienced personnel today emerges as the main problem in setting up a modern banking sector, under which credits can only be granted to companies whose prospects can be evaluated and who can offer some collateral. _International experience is also lacking, since past relations withforeign countries were all concentrated in one institution._ In Hungary, CSFR and Poland, independent banking systems have been legislated but currently lack electronic data processing equipment and other technology.

What institutional arrangements have replaced the State Curmncy Plan? What is the new allocation of responsibility between the National Bank and the Foreign Trade Bank in each of the countries? Who is funding training and technical assistance for the new debt managers? What borrowing instrumentsarebeingconsideredbysovereignsthatmay still have access to the market (Hungary, Czechoslovakia, Romania)? Are there any pre-determined borrowing targets by currency? What is the institutional forum in each country for developing a national strategy to assist private enterprise to gain access to foreign financing?

The first steps towards a two-tier banking system were taken by Hungary and Poland in 1987. The essence of the reforms was enacted in Poland in 1989 when the National Bank of Poland (NBP) was completely separated from its commercial banking functions and given a high degree of autonomy. As of January 1990 NBP is no longer required to submit a detailed credit plan to Parliament for approval. CSFR initiatedbankingreformsin 1990,andtheratteris still under consideration in Bulgaria and Romania.

The National Bank of Hungary was until recently under the control of the Council of Ministers, but legislation esin December 1991. A main role for the central bank is to provide finance for the public sector, but the new law limits te credit hathNBH must provide to the public sector. Italso requires the State to reduce its ownership share of commercial banks to 25% by 1997. Since the introduction of two-tier banking in Hungary in The answers to these questions were pursued in the interviewswithcommercialbanks,andwturnedouttoberather tablishi.g its independencewaspassed inconclusive. It appears that the National Bank of Hungary is the only well-organized entity with well-defined staff and a strategy to access the international capital markets, and that too appears heavily dependent upon what type of reception is 10 Vierna Institute of Comparative Economic Studies report of 9/91.

11