Financial crisis one more woe for beleaguered Cuba

Financial crisis one more woe for beleaguered Cuba
By Marc Frank
REUTERS

9:49 a.m. October 3, 2008

HAVANA – The global financial crisis has dealt another blow to communist
Cuba, already reeling from two powerful hurricanes and soaring import
prices, and it could force the government to speed up reforms, Western
diplomats and businessmen say.

The crisis has made credit tighter and softened demand for nickel, the
island's key export. It could also slow tourism revenues and financial
support from family members living abroad.

It comes at a particularly bad time for Cuba, where there were already
signs of a mounting foreign exchange shortage before the crisis surged
on Wall Street and hurricanes Ike and Gustav caused at least $5 billion
in damage, equivalent to more than 10 percent of Cuba's gross domestic
product.

Cuban President Raul Castro warned the country starting in mid-summer
that belts would have to be tightened because of rising costs for fuel
and food imports.

At the same time, the government began taking steps to ease its
financial crunch, said one businessman, who like others interviewed,
requested anonymity.

"First they insisted suppliers allow 360 days for payment instead of
180. Then they told some suppliers and creditors they needed to
restructure debt," he said.

Even before the two hurricanes struck within 10 days of each other
starting on Aug. 30, at least one Spanish bank had stopped handling
letters of credit for Cuba deals.

CRISIS AND OPPORTUNITY

Some of Cuba's payment problems have been settled or are being worked
out now, sources said, but the availability of future credit for Cuba is
in question because of the crisis.

"Credit has always been hard to come by and expensive because of their
payment history and U.S. pressure. It's hard to see how it could become
that much worse, but who knows," a European economic attache said.

Cuba, under U.S. economic sanctions for decades, is not a member of the
International Monetary Fund or any other multilateral lending
organization. The country has a Moody's rating of Caa1, or speculative
and poor. How much worse an already difficult financial situation might
become will depend on support received from oil-rich ally Venezuela as
well as China, and the Cuban government's willingness to push ahead with
economic reforms, the sources said.

When Raul Castro officially replaced ailing brother Fidel Castro as
president in February, he instituted some small changes such as the
opening of cell phone and computer sales to the public and began broader
reforms in agriculture.

The changes raised hopes, so far unfulfilled, of more reforms to
modernize Cuba's state-run economy. "If Cuba quickens reform, for
example opening up the retail sector to private individuals and
cooperatives, that would help domestically and be a positive signal even
to China," said a leader of the organization of Spanish companies
operating in Cuba.

The financial crisis also could provide an opening to renegotiate some
of the debt hanging over Cuba's economy, diplomats said.

Cuba's central bank has told creditors the country's foreign debt
increased by $1.1 billion in 2007 to $16.5 billion.

"In every crisis there is opportunity, and a possible solution would be
for Cuba to negotiate its debt with the Paris Club," another European
diplomat said.

Official talks with the Paris Club of rich creditor nations were broken
off in 1989, then resumed in 2000 only to be broken off again.

At the time some $20 billion in debt owed the Soviet Union and claimed
by Russia proved a major stumbling block. The Soviet debt issue has
since been dealt with bilaterally.

(Editing by Jeff Franks and Kieran Murray)

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