For a brief moment, Cuba appeared ready to return to international capital markets. It was late in the Obama era, months after historic rapprochement between the US and Cuba. And Raul Castro pledged to pay off the debt the country had defaulted on decades earlier, a first step in re-entering the world of global finance and securing the financing needed to revive an ailing economy.
Six years after restoring diplomatic relations with the United States, Cuba’s efforts to make peace with its creditors have derailed, and the island is as isolated as ever. The market for their old commercial loans is as good as dead, and when they trade, it only costs 10 cents on the dollar. That’s about 70 percent down from 2016, when optimism was at its peak.
Somber sentiment prevailed as foreign support dried up in recent years as the economy of former patron Venezuela collapsed. Relations with the United States went cold under President Donald Trump, and Joe Biden has signaled that reconciliation is not a priority in efforts to contain the pandemic and push through his infrastructure spending plan. A sharp drop in tourism triggered by Covid-19 has robbed the nation of foreign exchange and exacerbated pain caused by a drop in exports, which have fallen by a third since 2014.
With barely enough cash to pay for food imports now that Raúl Castro is relinquishing his last vestiges of power — marking the end of six decades of Castro family rule — Cuba can only honor the debt-repayment deals hailed as a sign of its return to the international scene few years before.
“The combination of the slowdown in the pace of reforms in Cuba, the impact of the situation in Venezuela and US sanctions is reflected in a balance of payments crisis,” said Pavel Vidal, a former Central Bank analyst who now teaches at the Pontificia Universidad in Javeriana Cali, Colombia. “That forced them to stop servicing their foreign debt.”
It’s a disappointment for investors, who were heartened when Raúl succeeded his brother Fidel in 2011 and made strides in paying off old government and state-owned company debts, some of which dated back to the 1970s. His government reached an agreement with 14 members of the Paris Club of Wealthy Governments in 2015 that forgave $8.5 billion, leaving $2.6 billion in arrears. Cuba was given 18 years to pay off the debt. Russia, its Cold War benefactor, had already forgiven 90 percent of its debt.
Trading in the legacy commercial credit surged in 2016 at prices as high as 36 cents on the dollar as investors saw an opportunity to capitalize on the Caribbean island’s return to the world stage. The financial world received another encouraging sign in late 2017, when Raúl Castro assured Cuba’s creditors “willingness to honor his obligations.”
A group of investment firms known as the London Club, which holds about $1.4 billion in defaulted private debt, has come forward and offered the government a settlement.
But at that point, the Trump administration was trying to pressure Cuba and thwart any efforts to normalize relations. Nothing came of the London club’s overture. Investors eventually filed a lawsuit in a London court, where the case is pending.
According to the most recently released government statistics, Cuba owed $17.8 billion in foreign debt in 2017, although the total has almost certainly increased since then. Even if it could start servicing the debt, the country faces other obstacles, including US sanctions and questions about how to compensate land and companies it expropriated during the revolution. US politics could be another obstacle to friendlier relations with professed communists as the Biden administration seeks to fend off proposals it leans far to the left.
The Cuban Foreign Ministry did not respond to a request for comment. The Paris Club declined to comment.
US policy under Biden will be driven by “support for democracy and human rights,” White House press secretary Jen Psaki said April 16. “A change in Cuba policy or additional steps are not currently among the top foreign policy priorities of the President.”
So there is no doubt that the prospect of Cuba selling a foreign bond is still a long way off. Exports fell to their lowest level in 15 years last year, leaving the country with little hard currency to pay for importing basic necessities. The economy shrank 11 percent last year, one of the worst contractions in Latin America.
However, there is hope that Cuba’s plight could motivate the new political leaders to step up efforts to clear up the defaulted debt problem and attract foreign capital. Miguel Díaz-Canel, who has been at the forefront of economic reforms after Raúl Castro took office in 2018, was named the new leader of the all-powerful Communist Party on Monday, cementing his influence.
Díaz-Canel has a track record of overseeing reforms, having led the painful process of unifying a decades-old dual currency system that would allow the country to “drive the transformations we need to update our economic and social model.”
And there is a possibility that Cuba could reap economic benefits from developing a Covid-19 vaccine. Health officials are conducting phase III trials of two candidates and plan to vaccinate nearly two million adults by the end of May. If the vaccines are successful, the island could reopen to tourism and potentially export the shots.
“The current situation could be the turning point that will lead to further reforms,” said Vidal, the former analyst at the Central Bank of Cuba. “They need to get their finances in order so they can attract international investment because that’s what they need.”
For now, however, the landscape remains bleak for investors. Cuba missed its agreed payments to Paris Club members in 2019. Last year, as Cuba’s economic downturn worsened during the pandemic, both sides agreed to suspend payments for the year.
There are currently no negotiations between the parties, said a person involved in the talks, who asked not to be named, citing private information.
“Both sides know that Cubans can’t pay anything,” said John Kavulich, president of the US-Cuba Trade and Economic Council, a New York-based researcher who focuses on the two countries’ relations.
by Ezra Fieser, Bloomberg