Tuesday, February 13, 2018

Restructuring Cuban Sovereign Debt--Private Lenders Put Pressure on the Cuban State

(Pix © Larry Catá Backer 2018)

The issue of sovereign debt has been a sensitive matter in Cuba for almost a generation. Cuba has been forced to borrow from public and private lenders even as it has vigorously denounced the contemporary system of sovereign lending. Since the 1980s, especially, Fidel Castro appeared as one of the leading political voices at the forefront of a theoretical approach to sovereign lending that suggest to center the development needs of states emerging from colonialism over the niceties of lending. In the face of IMF efforts to develop institutionalized quasi bankruptcy mechanics for public debt, Cuba sought to re-frame the issue of sovereign debt around the fairness of the debt.

Opposing the dominant vision is an anti-corporatist approach grounded in public law and the subordination of economics and markets to political control in the furtherance of deliberate state public policy and planning. States fail because it is in the interest of dominant states to use sovereign debt as a means of perpetuating subordination and a hierarchy of power among states. When a state fails to pay its debts, the focus ought to be on the creditor, and the fairness of the debt in terms of the larger public policy concerns - development, and the maximization of living standards for all individuals through state planning. (Larry Catá Backer, Ideologies of Globalization and Sovereign Debt: Cuba and the IMF)
The Cubans have sought to blend traditional views of the legitimacy of sovereign immunity, but now transformed as a vehicle for the protection of developing states against sovereign lenders whose debt contributes to the exploitation of states (Odious Debt Wears Two Faces: Systemic Illegitimacy, Problems, and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes). The object, of course was to remake the system of sovereign debt--to draw it back form the markets oriented premises of globalization and return it to the political real,m of statecraft but now with a very specific normative agenda. And also to rework sovereign lending in a way that permitted the Cuban state to avoid debt it now found inconvenient and oppressive to the extent of it burden it would put on the state to repay the debt. . Needless to say, this view has never been popular among private lenders--or those who buy unpaid public debt. Nor has it resonated with the most developed states, home to much of the sources of public finance.

Now London based holders of Cuban sovereign debt have made a move to seek repayment.  That triggers a host of considerations--on sovereign debt, on Cuban-European relations, on the special character of debt and on the way that the efforts may shed light on the transformation of global finance markets, all briefly considered below.

Cuba has spent the greater part of the last decade or more renegotiating its enormous sovereign debt load with a large menagerie of lenders--public and private--who (as is the case with most sovereign debt restructuring) were motivated not merely by the purely financial interests in repayment but also by broader political considerations. These restructuring were essential to a Cuban state getting closer (it thought) to easing relations with the United States, and requiring a better reputation as a borrower to begin an ambitious program of limited internal privatization and external state based development projects for which capitalization was essential. In 2015 Cuba was able to get a step closer to better integration with global capital markets when it reached a deal with the Paris Club (Agreement on the debt between Cuba and the Group of Creditors of Cuba (December 12, 2015) "The representatives of the Group of Creditors of Cuba and of the Government of the Republic of Cuba met from 10 December to 12 December and agreed on 12 December 2015 on an arrangement to clear USD 2.6 billion of debt in arrears due to the Group of Creditors of Cuba over an 18-year period.").

But the Paris Club resolution did not entirely eliminate the blockages that kept Cuba away from private debt markets--or better put, that substantially increased the risk of lending to Cuba (and thus increased Cuba's cost of borrowing significantly to the extent funds were on offer at all). The problem, of course, was negotiating a deal with private lenders who held a substantial amount of old unpaid debt, and who had been waiting decades for repayment in some cases. Well, it seems, their time has come now.  As report by Karin Strohecker nicely describes below (Cuba creditors offer "very significant relief" in debt proposal), Cuba must now consider a deal to pay of fits remaining unpaid debt if it is to secure better access to those financial markets that it has spent almost a generation working to discredit and transform.

The move by these creditors, based in London and ably represented by Rodrigo Olivares-Caminal,  does not come at an auspicious time for the Cuban state.  After the latest hurricanes, the deterioration of the Cuba-U.S. normalization process (and therefore the coordinated deterioration of hopes for financial benefit) puts Cuba in an awkward position.  They are in need of capital--and absent substantial support from the Russian (who have already had to write off a tremendous amount of debt but who might see political opportunity in extending credit now) or support from other sources, the Cubans may have little bargaining room, other than in the context of putting off repayment for as long as possible.  Two alternatives though may prove useful.  The first is the possibility of swapping debt for an equity position in significant state own project.  The second actually comes in the form of aid from the European Union which has recently indicated a willingness to set up its investment in Cuba (see, e.g., here). And in the shadows it is not clear what the U.S. may consider doing, especially in the wake of the Affair of the Sonic Weapons Attack (e.g., here). This is a perfect opportunity for the Americans to inflict more pain. But there may be additional new players.

China seeks to expand its One Belt One Road network globally.  Cuba may be a tempting access point to Latin American trade--as it once has been for the Spanish Empire.  That may make Cuba's private debt a tempting object for Chinese long term planning.  Even better, perhaps, the combination of OBOR interest and the facility of the Asian Infrastructure Investment Bank (AIIB) may serve to fracture global finance more cleanly along trade  and production blocks (see, e.g., here).Yet the Cubans have been good at playing off the interests all this generation's crop of suitors as well as it has in the past.  Perhaps, then, an accommodation will be possible, but it is likely to be expensive to Cuba, one way or another. And the expense will not merely be in the aggregate costs of capital (including the present value costs of the deal to retire this debt), but also the way that may impact the ability of the institutions of the state--and particularly the conservative faction within the Cuban Communist Party, to keep its ideological discipline--East German and 1970s in character--intact (e.g., here).

If Cuba wants to preserve what it can of its 2030 Economic Development Plan (e.g., here and here) then it may have to deal--with someone.  The coming months will be interesting. Below the reporting for Reures by Ms Strohecker.  In a future post my analysis of Cuba's germinal approach, the 1986 Banco Nacional de Cuba study: Cuba Deuda externa y su proceso de renegociación.


Cuba creditors offer "very significant relief" in debt proposal

Reuters Staff

By Karin Strohecker

LONDON, Feb 13 (Reuters) - Cuba’s commercial creditors have offered “very significant debt relief” in a proposal sent to cash-strapped Havana in late January, according to two advisers to the group, in a sign that holders of the defaulted debt are ready to ramp up the pressure.

The communist-run island has seen its financial situation deteriorate in recent months following the deepening of Venezuela’s economic crisis, lower revenue from commodity and related exports, devastation wrought by Hurricane Irma and tightening of business and travel restrictions by the U.S. administration under President Donald Trump.

In 2015, Cuba reached a debt deal with members of the Paris Club of creditor nations, but having not dealt with its defaulted commercial creditors in the London Club means the country is in effect shut out of international capital markets.

“The committee reached out to Cuba in late January,” said Rodrigo Olivares-Caminal, coordinator of the creditor group and a law professor at London’s Queen Mary University.

“We have made a good faith proposal to the government.”

The creditor group holds obligations representing a face value of $1.4 billion worth of Cuban debt and is made up of three funds - Stancroft Trust Ltd, Adelante Exotic Debt Fund Ltd and CRF I Ltd - as well as one commercial bank.

“We are trying to give the country another chance to reach an amicable understanding with creditors,” Olivares-Caminal told Reuters. “This would give them very beneficial terms to remedy their situation vis-à-vis capital markets.”

While details of the proposal were confidential, it would convey “very significant debt relief” said Lee Buchheit at Cleary Gottlieb Steen & Hamilton LLP, one of the world’s top restructuring lawyers who was retained by the group last year.

“Cuba negotiated a generous debt relief package with most of its bilateral creditors at the very end of 2015,” Buchheit told Reuters. “The London Club offer draws on certain features of the deal with the bilateral creditors but in some respects it is even more generous to the Cubans.”

Under the 2015 deal, a number of Paris Club of creditor nations forgave $8.5 billion of $11.1 billion official debt it had defaulted on through 1986, plus charges. Repayment of the remaining debt was structured over 18 years, and Havana paid the first two instalments due since.

As part of the accord, some creditors were also preparing to swap debt for an equity stake in local development projects. This was seen as a breakthrough with Cuba agreeing for the first time to give rich capitalist countries equity in development projects in sectors like manufacturing and agriculture.

Cuba does not publish up-to-date information on its foreign debt, citing a need to keep sensitive economic information from Washington, which it has long accused of trying to disrupt its financial and trade relations under a comprehensive U.S. sanctions regime.

However, the creditor group estimated it was holding at least 50 percent of Cuba’s private sector debt. Olivares-Caminal added the proposal would be open for a limited period of time, though declined to give further detail.

Cuba’s cash crunch and lower oil supplies from Venezuela have forced the government to slash imports and reduce the use of fuel and electricity. (Reporting by Karin Strohecker, Editing by William Maclean)

No comments: