According to a report in the Financial Times, Cuba’s commercial creditors have hired Rodrigo Olivares-Caminal, a professor at Queen Mary University of London, to help organize an effort to negotiate settlement terms for Cuba’s defaulted private sector claims.
A country’s debt is made up of official debts it has with other countries (bilateral) and commercial debts with banks and other private creditors. When a country defaults, creditors have traditionally organized themselves into two groups based on the type of debt. Official bilateral creditors, called Paris Club creditors, organize a non-binding rescheduling framework. Each member negotiates the particulars bilaterally with the debtor in question, and the honor system compels the members to abide by the club’s terms.
Commercial creditors organize into a London Club. Rodrigo Olivares-Caminal will be the chief negotiator for the London Club. London Club – like Paris Club – workouts are not binding but are important for perception and resolution of debts.
As of 2012, sovereign debt restructurings have been a pervasive method of resolution worldwide, amounting to more than 600 cases in 95 countries. Of these, 186 debt exchanges were with private creditors while 447 agreements restructured bilateral debt with the Paris Club.
Cuba defaulted on all its debts in the 1980s.
The Cuba Group of the Paris Club creditors includes 14 of the 19 sovereign, industrialized nations that have existing defaulted debt with Cuba. France is the largest single creditor. The US is not part of the Cuba Group of the Paris Club creditors included in last year’s negotiation.
A clause permits the signatory parties to negotiate “as soon as possible” similar debt not included in the current accord.
Last year, the Paris Club negotiated terms that were generous to Cuba. Creditors have forgiven $8.5 billion of Cuba’s $11.1 billion debt. The deal covers official debt defaulted on through 1986, plus interest, service charges and penalties. All the debts were denominated in euros and other currencies.
What this means
With a Paris Club deal in place, Cuba’s return to international debt markets is warming up. A London Club deal would likely lead to Cuba’s ability to tap commercial debt markets.
Momentum is on Cuba’s side. Creditors would likely be willing to invest in infrastructure to support growth in its fast-growing tourism industry – presently 50% of the country’s economy. Once the market signals responsiveness to Cuba’s sovereign debt, the island nation could hire a bank to market and sell its bonds to private creditors. At that point, Cuba’s new debt would receive a rating that would likely be near junk status in terms of the interest investors would demand for its country and commercial risk.
The other issue is Cuba’s status with the international financial institutions (IFI) such as the IMF and the World Bank. Presently, Cuba is not a member of these organizations, so any long-term development finance from IFIs will take years to implement.