Tag Archives: Debt

Cuba Grapples With Debt

The Cuban government has negotiated an agreement with the Paris Club, an informal body representing a collection of relatively rich creditor nations, regarding a significant portion of Cuba’s foreign debt. Specifically, Havana consented to pay Paris Club lenders $15 billion to cover longstanding obligations originating from a largely unaddressed Cuban financial default in 1986. The figure encompasses the principle amount due as well as subsequently accumulated service charges, interest and penalties.

“The final amount of $15 billion has been approved by both parties, so that is a big first step and now the creditors will meet to set policy for formal talks,” an anonymous diplomat involved with the negotiations told the press.

With the $15 billion bill established, Cuba and the Paris Club can now move on to the next phase of negotiations -restructuring the country’s payment plan. Sources with intimate knowledge of talks were confident that the lender nations, eager to settle Cuba’s external debt situation and clear the way for foreign investment in the Caribbean nation, would be open-minded and agree to accommodating payment terms with Havana.

“Everyone wants to put this behind them now and move forward, and frankly, after 30 years I think the banks will be happy just to get something back,” another diplomatic insider explained.

While the Cuban government remains unwilling to publicly comment on its debt negotiations, it nonetheless appears genuinely considered with covering Cuba’s foreign obligations. Current Cuban President Raul Castro, a veteran of the 1959 Revolution and the brother of Cuba’s former leader Fidel Castro, has repeatedly voiced his intention to get Cuba’s fiscal house in order and pay down Cuba’s debt since assuming power in 2008.

In an effort to reform Cuba’s finances, and thus please the country’s international creditors and attract new foreign investment, Castro has reduced his government’s expenditures by cutting state payrolls and subsides. His related effort to limit the amount of imports arriving in Cuba has substantially improving the island’s previously imbalanced trade situation.

Thanks in large measure to Raul Castro’s policies, Havana has been able to reach amenable debt payment terms with several of its foreign creditors -including Japan, Russia, Mexico and China- in the past four years. In many instances, creditors forgave anywhere between 70 to 90 percent of what Cuba owed to them. There’s reason to believe that Cuba will be able to secure a similarly favorable payment plan with the Paris Club in the near future.

Positive developments aside, the Economist Intelligence Unit, a private financial analysis organization, estimates that Cuba’s foreign debt currently stands at around $26 billion -a considerable sum for a small underdeveloped nation. As Cuba gains access to much-needed new sources of financing and investment abroad in the coming years, owing to its rapidly improving relations with its formerly hostile neighbor the United States, it’s government will come under increasing pressure to substantively address these obligations. Recent actions by the Castro regime display a definite willingness to do so.

The nation’s that make up the Paris Club include Australia, Austria, Belgium, Britain, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland and the United States. The unofficial consortium maintains a special working group on Cuba.    

                                          

Tensions Flare in Puerto Rico’s Debt Battle

Disgruntled students from the University of Puerto Rico took to the streets of San Juan last Wednesday to protest a government plan to slash their school’s funding by some $166 million. The spending cuts formed part of a $1.5 billion austerity program that the island’s governor, Alejandro García Padilla, had hoped to implement in order to put a dent in the territory’s whooping $72 billion debt and calm nervous foreign investors with a stake in Puerto Rico’s financial solvency.

Heated confrontations between the demonstrators and police, as well as a bomb scare at the governor’s mansion, prompted García Padilla to abandon some of the controversial cuts by Thursday. He subsequently met with Puerto Rican legislators and drew up a revised, more revenue-centered, budgetary plan in an effort to salvage the larger austerity package. The new plan increases the island’s sales tax by 4.5 percent and introduces a new value added tax of 4 percent on goods and services that were previously exempted from such dues. Tax increases aside, the replacement proposal includes $500 million in painful public spending cuts as well. Whether the government will be able to implement the austerity measures in the face of almost certain public backlash remains to be seen.

Puerto Rico’s ongoing debt crisis has already led to 150 school closings in the past five years. According to the government’s own estimates, 600 schools may face closure in the next five years if the territory’s fiscal situation doesn’t improve.

Puerto Rico’s Education Secretary, Rafael Román, pointed to the mass exodus of tens of thousands of Puerto Ricans in recent years as a major factor in the government’s decision to move ahead with school closings. Puerto Rico’s 3.5 million population has shrunk by a staggering 7 percent over the last decade and is projected to contract by a further 0.6 percent this year alone. 

A significant portion of the people leaving Puerto Rico are doing so in reaction to the island’s deep and longstanding recession. They’re fleeing the Puerto Rico’s 44 percent poverty rate and its 14 percent unemployment rate (the latter figure, which is double the U.S. mainland’s rate, is likely vastly understated given its failure to account for those who’ve simply dropped out of the labor market). Given the territory’s dire fiscal situation, prospects for economic growth in the near future remain dim.

Many have pointed to the Puerto Rican government’s stubborn austerity fixation as the primary cause of its depopulation and enduring recession. In 2009, then-governor Luis Fortuño, a supply-side oriented member of the Puerto Rican Republican Party, laid off 17,000 public employees and effectively nullified collective bargaining rights as well as existing, and future, union contracts in an effort to please foreign creditors and avoid a government shutdown. His parallel corporate tax rate reductions, designed to attracted investment in Puerto Rico, utterly failed to offset the significant economic harm caused by these cuts. Although the territory’s current governor is from the comparatively less right-wing Popular Democratic Party, he has embraced similar austerity initiatives in addressing Puerto Rico’s debt obligations.