We argue both against government-led gradualism and against wholesale
application of bankruptcy in dealing with loss-making SOEs. Instead, a
n incentive framework and legal environment should be created for the
major nongovernment creditors to initiate restructuring. The details o
f such an environment are laid out using the recent Polish enterprise
reform program. Naturally, assigning such an important role to commerc
ial banks makes financial sector reform commensurately more urgent. Th
e success of the Polish financial and enterprise reform package sugges
ts that the decentralized, nongovernment approach to dealing with loss
-making SOEs promoted here has a chance of success. (C) 1997 Academic
Press.