The hunt for Cuban debt

By Manuel Alberto Ramy

HAVANA – The other day, traveling through that vast digital planet called The Web, I landed in Moscow – not at Sheremetyevo Airport but in Russia Today – and parked at the section on the economy.

I’m no expert but, because I travel on the curious-tourist plan and hold a Cuban passport, I was drawn by a headline saying “Western Investment Funds Are Hunting for Undervalued Cuban Debt.” Attractive title.

Who would buy a sovereign debt in such a sorry state and why? If we’re a country that imploded in the 1990s, just like the Soviet Union, touched bottom and now is struggling to get out of the hole, what motivates that purchase of undervalued debt and what is its significance?

I read the note, thought about it, saved it and communicated with an expert so he could explain it to me. First, I’ll transcribe it here and will continue later:

“Western Investment Funds Are Hunting for Undervalued Cuban Debt.”
Cuba’s National Statistics Office alerts about unprecedented trend

From Russia Today (24 Oct 2012)

“American and British free-investment funds have recently been used to purchase undervalued Cuban debt bonds, a trend announced by Cuba’s National Statistics Office. The move may be related with the expectation of changes on the island.

“According to a report from the statistics office, most of the bonds were issued in the 1970s, in German marks (a currency no longer in existence), yens, Canadian dollars and Swiss francs. There are also U.S. dollar bonds, about 52 million of them, that were issued before the Revolution and are usually called “Batista bonds.” 

“Agencies that specialize in finance stress that the interest shown by the private funds can be explained by the high profit margin (up to 500 percent) that such investments could create. The sovereign bonds could skyrocket in value if drastic changes of an economic or political nature occur in Cuba, the experts say.

“In case of greater flexibilization, the bonds could rise from 6 or 10 cents to 40 or 50, which would imply five-fold earnings, estimates Claudio Loser, president of Centennial Group Latin America (CGLA), an international consulting firm.

“As the politologists point out, the growing interest of investors in the Cuban bonds could be attributed to several causes. On one hand, the speculation could have been triggered by the recent reforms made in the Caribbean country, i.e., the so-called economic updating, along with long-awaited changes in the immigration policy.
“On the other hand, investor interest might be related to alleged changes in the political system in Havana, something that has been repeatedly rejected by the authorities. The third cause might be the presidential elections in the United States next month, because – as many people expect – during his second term Barack Obama could lift the economic and commercial embargo on the island, which would generate a revaluation of the Cuban debt.”

The world of finances is as foreign to me as quantum physics, so I asked the young and brilliant Cuban economist Pavel Vidal, currently a professor at the Pontifical Xavierian University (Cali, Colombia), to explain the motives to me – in other words, to throw me a lifeline.

 “It means that the financial markets have better expectations about Cuba’s economic future and its reforms,” he said. But, “the important thing about this judgment by the financial market, reflected in the price of Cuban debt, is that it is impartial and objective because it is moved by purely economic interests.”

Wow, I said to myself, we’re dealing with stuff that’s at the heart of so many current developments, some clearly visible, others (often the most important) deep inside the economic changes.

 “The increase in the price of Cuban debt, if significant and sustainable, can have a favorable yet indirect influence on the type of interest that Cuba pays in international markets to obtain funding,” Vidal told me.

How so? I asked.

 “It could reduce the cost and increase Cuba’s facility to obtain private credit in the international markets, although it is too soon to reach those conclusions.”

The experts, including the more lucid ones – like my consultant, who is also a professor at the Xavierian University in Bogotá – are prudent and cautious, especially when it comes to the world of bonds, prices and markets.

 “There was an expectation that, once [the government] allocated expenditures for 2009-10 (fiscal expenditures, imports) and went ahead with structural reforms, it would turn its attention to the Cuban economy as a place for direct investment and financial investment,” Vidal said.

Apparently, events are proceeding along that path.

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