Cuba-US Thaw Leads to Debt Renegotiation with Paris Club

By Emilio Morales*  (Cafe Fuerte)

Bruno Bezard, head of the Paris Club, during his visit to Havana in March.
Bruno Bezard, head of the Paris Club, during his visit to Havana in March.

HAVANA TIMES — The announcement that the Paris Club and Cuba have set the island’s foreign debt with those countries at US $15 billion is a positive contribution to the strategy traced by the Raul Castro government, aimed at inserting the country into the world economy.

At root, the strategy is aimed at insertion in the international financial system, so as to be able to secure large credits in the middle term and use these to bolster Cuba’s economic development during the reform process. This is going to be a complex and time-consuming process, particularly owing to the number of adjustments that this insertion in the global financial system requires.

This first step, that of acknowledging the debt, creates an atmosphere of confidence between Cuba and its debtors and will allow the country to develop a plan for the payment of the debt and pave the way for Cuba to receive new loans. The total amount of Cuba’s debt is estimated at some US $26 billion.

Taking Advantage of the Thaw

Talks with the Paris Club were interrupted in 2001, when Cuba had the enormous burden of the US $35 billion debt inherited from the days of the generous soviet loans. The last annual report published by the Paris Club indicated that Greece, Cuba, Indonesia, China and India were the countries with the largest debts with this financial entity, which gathers the 16 richest countries in the world.

There is no doubt the thaw between the United States and Cuba has been an influential factor in the renegotiation of Cuba’s debt with the Paris Club. The debtors of old could not stand by with their arms crossed before the new changes in Cuba-US relations. Its domino effect had to reach the issue of the foreign debt.

This past March, the head of the Paris Club, Bruno Bezard, visited Havana to negotiate with Cuban authorities and find a solution to the debt problem.

Map of the Paris Club.  Ilustration:
Map of the Paris Club. Ilustration:

In recent years, the Cuban government has renegotiated its foreign debt with several of its chief debtors, with a view to securing new credits that would help the ailing national economy and alleviate the burden of the embargo some.

After the new foreign investment law came into effect exactly one year ago, the renegotiation of the debt with each of Cuba’s debtors constitutes a bold move aimed at drawing the capital that the country’s development sorely needs. The search for new partners that can invest under the new law has become a priority of the Cuban government, such that addressing the issue of the debt and demonstrating a willingness to pay is a sound strategy – one that is beginning to yield fruits in the process of trying to access the global financial system.

Encouraging Results

The outcome of the debt renegotiation process is very encouraging with respect to the plans to draw foreign investment being impelled by the Cuban government. The country has successfully restructured a good part of its foreign debt and has had its debt with several countries cancelled: China (47.2%), Japan (80%), Mexico (70%) and Russia (90%). This way, it has secure substantial debt reductions through new payment plans.

This explains the high-level visits by political figures, companies and businesspeople from these four nations, which have been joined by delegations from France, England and Spain.

The news comes on the eve of the round of talks between Cuba and EU representatives, aimed at reaching a political and economic cooperation agreement, scheduled to take place in Brussels from June 15 to 16.

In the coming months, Cuba can be expected to open its ledgers, as a show of good faith and transparency, and with a view to accessing international credits.

A Cuban Mystery

For many years, the Cuban government has not published any official information about its reserves at the Central Bank of Cuba, such that the true value of these reserves is a complete mystery. One can have a sense of this, however, by looking at the deposits Cuba has in international banks, an information published by the International Payments Bank of Brasilia.

In September of 2013, the sum total of Cuban deposits at international banks – a sum that went from US $4.105 billion to $ 2.717 billion from December of 2011 to December of 2012 – was estimated at $2.167 billion (this represents a sudden, 47.21% drop).

There are two probable factors behind this drop in international reserves. The first is the use of these reserves to pay debts with the more important debtors. The second is the purchase of food products which, owing to the rise in prices in the world market and the failure to meet internal production plans, forced the government to use some of its financial resources, in order to avoid a supply crisis.

Renegotiating the foreign debt, reaching an agreement with debtors and making the country’s reserves known are needed steps at this time, when Cuba seeks to insert itself into the global economy. The will to move in this direction shown by the Cuban government is at least a strong indication that more profound changes to the Cuban economy could take place in the coming months.

If the steps taken by the Cuban and US governments to re-establish diplomatic relations and lift the embargo are important, it is crucial that the leadership clinging to power on the island begin to tear down the internal walls it constructed over fifty years to protect itself from the challenges and attacks of its powerful neighbor. Erasing the image that Cuba is reluctant to meet its financial commitments (one recalls the campaign against the unpayable foreign debt, in 1985) is one of the walls built during such confrontations.

Let us hope that, this time around, the untouchable walls of the past will be dismantled, so as to allow the Cuban people the opportunity to prosper and enjoy development once and for all.
*Cuban economist. Former chief of marketing strategies for Cuba’s CIMEX corporation and author of the books “Cuba: A Silent Transition Towards Capitalism?” and “Marketing without Advertising, Brand Preference and Consumer Choice in Cuba”. He is the current president of The Havana Consulting Group (THCG), based in Miami. The statistical tables used in this article were prepared by THCG.

4 thoughts on “Cuba-US Thaw Leads to Debt Renegotiation with Paris Club

  • China is more capitalist than the U.S., they are kicking it. The Scandanian model does work and Cuba may want to give it a try. What does not work is the old Soviet model of coercive bauracracy. Cuba, I am happy to see under Raul is making progress in moving away from the old system by introducing a market even as they maintain core elements or Socialism.

    The impact of inequality in the U.S. is way over stated. Another man’s material wealth does not define my self worth. In the U.S. plenty of opportunity exists for those that want to earn it. For those that don’t, and plenty don’t from all backgrounds, making it in America is plenty easy.

    I grew up in Cuba, so I have a darn good idea of both systems. I support a safety net and taking care of vulnerable populations. But the envy of the wealthy and quest for materialistic equality is for the birds. I saw first hand the destructive consequences in Cuba of such thinking.

    I do agree agree that America needs to step back from the crony capitalism that people like the Clinton’s represent. It will be tragic if those two get a chance to pay off their contributors.

  • “Dead beats.” I could not have said it better myself I was wondering (as I often do) are there any countries to which Cuba does not owe money? Madagascar? What countries will want to do business with a country that has outstanding debts, is famous for not paying its debts and has countries forgiving its (Cuba) debts. Curiouser and curiouser. Bill Gates should buy Cuba. Que piensas?

  • It does work extremely very well in Sweden, Denmark, Finland, Norway…..and China that owns an important part of the US debt…..unless you believe that Crony Capitalism works very well in US via the increasing and alarming rate of inequalities………..

  • Dead beats do not get loans or investment, a very good lesson that at least in part seems to have been learned. Raul is making some very good changes to get Cuba into the world market economy. Cuba will be able to better afford the drain of social programs with a productive sector.

    State socialism focused on redistribution does not work, period. A societies prosperity is measured by what it can produce, not by what it can consume. Raul’s reintroduction of incentive and distributed control of business via self employment and cooperatives are introducing a new vibrancy to the economy.

Comments are closed.