Cuba debt deal signals re-engagement with international financial markets

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Cuba took another conciliatory step toward international financial markets in recent months with a $40 million payment to its Paris Club creditors to several creditor countries, less than one year after signing a monumental debt restructuring agreement.

Following decades of default, 14 member-states of the Paris Club agreed to waive $8.5 billion of Cuba’s outstanding $11.1 billion debt. Now, Cuba is expected to pay $2.6 billion over an 18-year period, including interest and penalties. As part of the implementation process, Cuba signed individual restructuring deals with each creditor nation in 2016, converting a large portion of the remaining debt into cooperative agreements and development credits.

The Paris Club, which began forming in 1956, is a forum of 21 wealthy creditor nations that work collectively to renegotiate official government debts and provide relief to poor and emerging countries. Commercial debts are treated separately by a group of private creditors known as the London Club.

“The creditors in the Paris Club are creditors that have a longstanding interest in Cuba, both in investment interest, and as sort of a sovereign interest,” says José M. Gabilondo, a professor of law at Florida International University in Miami. “So if Cuba runs into more problems, these countries will take the long view in terms of making more changes because they are professional creditors and realize that sometimes it takes debtors a very long time to come out of the well.”

While the full extent of Cuba’s external debt is unknown, Cuban leaders have come to terms with $50 billion in debt to foreign creditors over the past six years. In 2011, Cuba signed a restructuring agreement with China, its top creditor and second largest trading partner, for an estimated $4 billion in government and commercial debt (this year, Granma—the official newspaper of the Communist Party—reported the debt canceled altogether as part of a bilateral cooperation agreement signed in September).  In 2012, Japanese commercial creditors reportedly waived 80 percent of a $1.4 billion debt, with the rest to be paid over a 20-year period. Following suit in 2013, Mexico forgave 70 percent of Cuba’s $487 million debt to the Banco Nacional de Comercio Exterior (Bancomext) amid speculation that Mexico hoped to gain a trade advantage over Brazil.

And just months after Cuba sided with Russia against a 2014 UN resolution to invalidate the annexation of Crimea (in a move that some viewed as being done behind the Paris Club’s back) Russia signed an agreement to waive 90 percent of an outstanding $32 billion in Soviet-era debt. The remainder was to be invested in Cuba’s economy.

Rodrigo Olivares-Caminal, an expert on sovereign debt who represents a group of Cuba’s commercial creditors, at the time characterized the Paris deal as “the last step before negotiating with the London Club creditors.” In 2016, Olivares-Caminal began negotiating a settlement on approximately $1.2 billion in commercial debt; Cuba’s full debt to private creditors, however, could total up to $8 billion.

Swapping debt for development

Under the terms of the 2015 Paris deal, member nations are allowed to convert a portion of Cuba’s remaining debt into credit for development, a swap that gives creditors a foothold in Cuba’s frontier economy.  Under the terms of the 2015 Paris deal, member nations can allow a portion of Cuba’s debt payments to instead go toward local development projects. These debt “swaps” not only allow creditor nations to strengthen diplomatic relations with Cuba, but are typically coordinated with the expansion of private equity interests on the island as well.

Shortly after the deal was signed, France took the step of converting half of Cuba’s remaining debt, over $225 million, into a joint fund for development projects, and in October opened an Agence française de développement (AFD) office in Havana. Subsequent agreements with Spain and Italy both strengthen bilateral economic ties; Italy committed roughly $90 million of Cuba’s debt to socioeconomic development projects, and Spain secured a counterpart fund that will allow its businesses to make medium and long-term investments on the island.

“The importance of the Paris Club agreement to Cuba was first, 80 percent or so of what they owed evaporated [and second] the repayment terms for the remainder were incredibly favorable,” says John S. Kavulich, president of the U.S.-Cuba Trade and Economic Council. “They were able to use some of the debt as creating incentives, by making it equity that could be used by companies located within the Paris Club creditor nations.”

Swapping debt for equity, Kavulich says, “almost allows Cuba to provide their contribution virtually. It doesn’t require them to put up a lot of cash in order to get something, and that’s Cuba’s general commercial, economic and political model.”

This past September, Raúl Castro held almost continuous meetings with leaders of Japan, Iran, China, and Russia—all of the nations that had offered large portions of debt cancelation, put funds toward development, and angled for favorable trade and investment deals.

In the midst of the negotiations, Prime Minister Shinzo Abe became the first Japanese leader to visit Cuba since the 1959 revolution.

During his meeting with Castro on September 22, Abe agreed to waive 65 percent of Cuba’s sovereign debt, equal to $1 billion, and keep a third of the remainder in the Cuban economy as an investment fund for Japanese businesses. Just prior to the visit, Japan’s Chief Cabinet Secretary Yoshihide Suga told the UN General Assembly that his government “hopes to help Japanese firms expand into Cuba,” inspired by the U.S. thaw.  During Chinese Premier Li Keqiang’s meeting with the Castros two days later, China signed at least 12 cooperative agreements with Cuba, including the cancellation of Cuba’s debt, and agreements to finance development projects across several sectors.

Days after Keqiang’s visit, Russia’s Deputy Minister of Economics Nikolai Podguzov announced that his country was offering Cuba 55 projects worth almost $4 billion, a figure close to the remaining Soviet-era debt. Priorities for the investment include infrastructure, energy, IT, and transportation sectors—all of which involve Russian exports to Cuba, according to a report by Russian news agency TASS.

While Cuba’s credit rating still indicates a ‘very high risk,’ according to a July 2016 D&B report, its outlook is characterized as ‘improving’ due to a series of investor-friendly economic reforms, and renewed diplomatic relations with the United States. Highly favorable debt settlements with Paris Club members and other bilateral trading partners show a global interest in Cuba’s economic potential, as well as a sense of urgency by other nations to get in beforethe Cuba’s northern neighbor becomes a potentially major competitor.

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