Mexico reached a deal this week to restructure $400m of Cuban debt in an effort to boost commercial relations, and sparking growing optimism that Cuba’s sovereign debt market may eventually normalize as the Communist state enters a transitional phase.
Under the agreement, the money will now be refinanced and deployed to boost Mexican exports to the nation after new statistics from Mexican bank Bancomext showed that bilateral trade fell to only $200m last year compared with an annual average of $435m in the 1990’s.
Cuba’s central bank suspended debt repayments to Latin America’s second-biggest economy in 2002 after former Mexican president Vicente Fox blasted the country’s human rights record.
This week Fidel Castro announced his retirement fuelling the expectation that the Cuban leadership will nominate acting President Raul Castro as his brother’s permanent successor.
Raul Castro is seen as a reformist and has already sought to reform the country’s debt dynamics.
He spearheaded the international pariah’s drive to restructure $166m of defaulted loans with Russia last year, in an effort to diminish the effects of the 46-year US economic embargo.
Fidel Castro’s resignation this week and the agreement with Mexico has sparked hopes that Cuba will eventually adopt market-friendly policies - a boon for the exotic fixed-income investor.
“This week’s events crystallize the sort of transition everyone has been expecting. Although it does not signal overnight changes, the modernizing process is under way since Raul has already established a track record of trying to reform Cuba’s institutional and economic arrangements,” said Stuart Culverhouse, chief economist at the specialist illiquid emerging market brokerage Exotix.
This investment firm trades distressed Cuban debt and estimates that the total sovereign defaulted debt stock stands at $14bn.
Half of this comprises of debt issued since its 1986 debt moratorium and languishing securities in the country’s banking system during its restructure in the 1990’s.
It is estimated that $7bn of so-called ‘active’ debt - including the original principal and accumulated interest - is evenly split between public and commercial creditors.
The London Club, an informal group of European banks, holds around $1.25 billion of the state’s non-performing debt. This includes a now-historic Credit Lyonnais syndicated loan that currently trades at $15-15.50 per 100 basis points.
Culverhouse suggests that the sheer cheapness of Cuban debt is currently a great buying opportunity with only Sudanese debt more expensive.
In fact, only partial relaxations to investment in the country could substantially increase secondary market prices - in anticipation of further economic and political reforms.
Nevertheless, this week’s deal with Mexico suggests that bilateral measures to fully normalize the sovereign’s debt portfolio will have limited success until a legally binding international agreement has been reached, he said.
“So far selective agreements have been made but the international community would prefer it if a broad, transparent agreement was being discussed,” said Culverhouse.
“Also a lot of bilateral agreements are tied to the provision of new financing, and it is not clear the extent to which these creditors can reduce their exposures.”
But Culverhouse noted that the international community is now looking to regularize relations with the communist state with the US under pressure to soften its Cuban policy mindful of the political transition, and the lucrative commercial opportunities.
“Although it is likely that only the Democrats are willing to reconsider outright the embargo, there is a lot more pressure on Capital Hill for a move in this direction than in the past,” he concluded.