At the High Court in London, Cuba risks losing the legal battle, marking its end

At the High Court in London, Cuba risks losing the legal battle, marking its end
At the High Court in London, Cuba risks losing the legal battle, marking its end
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The legal battle between Cuba and CRF-I Ltd, an English investment company which boasts a credit towards the Caribbean state equal to 72 million euros which was originally granted, began on 23 January in the High Court of London to Cuba by European banks in the 1970s and 1980s in Deutsche Mark.

The Cuban authorities are relying on an ideological line of defense in which they have labeled CRF-I Ltd as “a fund of vultures” and have stated in their legal argument that the English Court “has no jurisdiction” over the matter. CRF I Ltd went to the London High Court three years ago after Havana rejected a debt relief offer made by CRF I Ltd and some other bondholders in 2018. “The other side, even at this late stage,” CRF I Ltd chairman David Charters told Reuters, and added to CNBCha: “You make offers and nothing happens, you are ignored and rejected, so what do you do? It’s been a decade.” In 2018, the London-based company offered the Cuban government a better deal than the one the country reached in 2015 with bilateral creditors for billions in unpaid debts but Cuba still ignored the offer.

The communist-run island has seen its finances deteriorate further in recent years, due to the inability of the dictatorship to run the country, the corona virus pandemic and restrictions put in place by former US President Donald Trump. In 2015, Havana reached a deal with members of the Paris Club that saw about three-quarters of that debt forgiven. But not having resolved the problems with its commercial creditors of the so-called London Club, Cuba remains excluded from the international financial markets. “The BNC and Cuba have never ignored their debts and have always maintained their interest in negotiating with their legitimate creditors,” the Cuban Central Bank said before the trial began, but beyond words, Cubans are still defaulters. Other Latin American nations, notably Argentina, also fought protracted legal and political battles for years to then settle with international funds that bought up the defaulted debts cheap and initiated court cases. The London trial is expected to last eight days and will feature remote testimony from a former Banco Nacional de Cuba employee, Raul Eugenio Olivera Lozano, who is in Cuban jail. According to documents filed in the case, Lozano is serving a 13-year prison sentence after being convicted in Cuba of accepting bribes of more than $25,000 in exchange for processing documents that allowed the loans in question to be reassigned to CRF I Ltd by the ICBC Standard Bank of China.

In filing court documents, CRFI Ltd claims the bribery claims are false and that Lozano was charged by the Cuban government so he would not have to repay the loans. In more recent documents, however, the Cuban government appears to have withdrawn from the he accused the official of bribing the official, arguing instead that the bank executives who facilitated the debt reassignment did not have the authority to do so. The lawsuit is costly for both parties so that to date, the Cuban government has spent approximately $3 million in legal fees in its defense and the plaintiffs (CRF I Ltd) have spent approximately $2.6 million. In the UK, the loser pays the winner’s legal costs, meaning one party will spend nearly $6 million. This is the first time Cuba has faced legal action over trade debts dating back to the 1980s and 1990s and if CRF I Ltd were to win it could lead to further lawsuits from creditors with billions of claims and failure to comply with the ruling could lead to the seizure of Cuban state assets. Furthermore, Cuba would no longer be able to borrow on international capital markets until its debts are serviced. According to the World Bank, Cuba’s gross domestic product in 2020 was $107 billion, slightly higher than the budget of New York City. The country has managed to survive for decades thanks to financial aid from the former Soviet Union, Venezuela and China. But with Venezuela financially weak, Russia busy on other fronts – notably Ukraine, and China facing a weaker economy, those lines of credit have dried up or nearly dried up.

According to CNBC: “Due to the US embargo against Cuba, American investors are prohibited from owning and trading Cuban debt, which frustrates some frontier market hedge fund managers in the United States. They argue that holding Cuban debt would better serve Washington’s foreign policy interests because it would give Americans a seat at some future negotiating table.”

In addition to the commercial debt, there are still nearly 6,000 outstanding loans from American companies whose properties were confiscated by the Cuban government after former leader FidelCastro came to power in a 1959 coup. John Kavulich, the The longtime head of the US-Cuba Trade and Economic Council, a private, non-partisan non-profit organization, told CNBC, “The lawsuit may prove challenging for the US and Cuban administrations to negotiate a settlement for the 5,913 claims worth $1.9 billion.”

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This type of credit is traded on the secondary financial markets and this is where investors operate who have specialized in buying them at discounts to the nominal value of the loan and then negotiating with the creditor government. Usually, you also avoid the courts for legal costs and close with a discount on face value and a portion of the past due interest. For decades, Cuban debt traded at 8 to 10 cents on the dollar, with occasional spikes driven by events like the death of former Cuban dictator Fidel Castro in 2016 or the temporary thawing of US-Cuba relations under then-President Barack Obama in 2014, hoping a deal was more likely. Being paid off with very old and defaulted debt is not without precedent. Iraq’s debt traded at between 8 and 10 cents on the dollar for a decade, and then settled for about 32 cents on the dollar after the US invasion in 2003. Even though Cuba’s defaulting debt is nearly 40 years old , there is a precedent for bondholders waiting even longer. More than 300,000 holders of tsarist-era Russian bonds, which the Bolsheviks defaulted in 1917 after the revolution, received their payout in 2000. A situation, the one being debated in the austere courtrooms of the London High Court, which boils down to a phrase by the American writer George D. Prentice: “Some people use half their ingenuity to get into debt, and the other half to avoid paying it.” Meanwhile in Cuba the population has nothing to eat, there is a shortage of medicines and basic necessities and anyone who criticizes the regime ends up in prison. But the worst fact is that there is no serious organized opposition capable of changing things.

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