The High Court in London has heard a case involving a foreign debt dispute between CRF 1, a Cayman Island registered investment fund, and the government of Cuba. The outcome is not yet clear, but the signs suggest Havana is considering some kind of wider agreement with its creditors.
CRF 1 (formerly known as the Cuba Recovery Fund) says it has accumulated US$78m of historic Cuban commercial debt originally issued by Cuba’s Banco Nacional de Cuba (BNC) and has for several years been trying to reach an agreement with the government to secure phased repayment. The Cuban authorities counter that CRF 1 is a “vulture fund” which is not a legitimate creditor of either BNC or the Cuban state. They also argue that corruption was a factor in securing the original loan. Although the trial ended on 2 February, a verdict is expected to take weeks, and is itself likely to be appealed. The eventual outcome may not be publicly announced.
The implications of the case could nevertheless be far-reaching. Cuba defaulted on its foreign debt in 1986 and since then, already affected by long standing US economic sanctions, it has had very restricted access to western capital markets. There is some very limited secondary market trading in defaulted Cuban bonds, with prices often down to around 10% of face value.
The Havana government does not regularly publish foreign debt data. In 2019 the authorities said total debt was just under US$20bn, but more recent independent estimates put it at more than US$30bn. Private sector investors are believed to hold some US$7bn worth of Cuban bonds, by face value. According to Spanish news agency EFE, CRF 1 “is the largest holder of Cuba’s sovereign bonds” totalling US$1.3bn. Whether or not CRF 1 wins the High Court case, Cuba remains under pressure to reschedule its debts. A CRF 1 victory would however sharply increase the cost of doing so.
A sign that some sort of creditor agreement is being considered to ease the crippling shortage of foreign currency came from justice minister Oscar Manuel Silvera, who told the Financial Times in early February: “The position of our country is that we recognise our legitimate debts and our legitimate creditors. Our position is firstly to recognise them, be transparent, to always talk with our creditors and to seek terms which are mutually favourable to honour these obligations.”
What is clear is that Cuba’s dilapidated economy continues to struggle with an acute shortage of foreign currency. Power cuts are again causing disruption. In a two-week period in late February the country experienced four outages, attributed to a lack of maintenance and fires at transmission lines. Analysts note than in the recent past (July and September 2022) power cuts have been a factor triggering anti-government protests. Despite short-term fixes, Cuban economists say at least US$250m a year in hard currency will be needed to keep the power grid working. Some suggest the entire power grid needs to be rebuilt at a cost of US$10bn – well beyond the island’s current financial capacity.
Regaining access to international financial markets will remain a major challenge. In 2015 the country struck an agreement with the Paris Club of official creditors, writing off two thirds of existing debt. In theory, Cuba could seek to raise commercial funds by issuing new bonds, but in practice that will require, as a precondition, a restructuring agreement with the existing private sector bondholders.
Change at the Central Bank
As the court hearing in London drew to a close the government announced it was dismissing the head of the central bank (Banco Central de Cuba – BCC, which took over many of the functions of BNC), Martha Sabina Wilson González, who would be replaced by Joaquín Alonso Vásquez. No reason was given for the change. Wilson González had been in her post for four years. An official statement thanked her for her service and said she would take up “other duties”. The new BCC president (a post that has ministerial status) has held several positions in the Cuban banking system.