Dear Mr. Berko: What do you think of buying the Cuban 4.5 percent bonds issued in 1937, which came due in 1977 and sell for about 10 cents on the dollar? Now that President Barack Obama has begun to normalize relations with Cuba, I think those bonds could pay off, especially if the embargo were to be lifted. Seeing as they sell for 10 cents on the dollar, for $10,000 I could buy bonds with a face value of $100,000. What do you think? — CW, Kankakee, Ill.
Dear CW: While the U.S. was imposing sanctions on Iraq, Iraq's sovereign bonds traded between 10 cents and 11 cents on the dollar. After the U.S. invasion, a settlement was negotiated by the Paris Club at 32 cents on the dollar. The Paris Club, an informal group of international officials, assists debtor nations in coordinating their debt solutions with creditor nations, helping them settle their sovereign debt. And the London Club helps nations settle loans that were extended to debtor nations by private banks and corporations. Liberian debt, which was selling at 3 cents on the dollar in 1991, was settled at 21 cents when a new president who had worked for the World Bank was elected to lead that country. Before 1993, Vietnamese debt was selling at 10 cents on the dollar, and after the embargo was lifted, that debt was settled at 30 cents. The list of settlements during the past 50 years is impressive. Since 1956, the Paris Club has brokered 430 debt agreements with 91 nations, totaling nearly $600 billion.
Last July, Russia agreed to write off Cuba's $32 billion of Soviet-era debt, reducing Cuba's foreign debt (bonds and loans) to $19 billion. Last December, Obama decided to restore diplomatic relations with Cuba. Resultantly, some of Cuba's debt, particularly the 4.5 percent Batista bonds you mentioned, became attractive.
Fidel Castro defaulted on the bonds in 1960. Now some speculators suggest they're attractive. These bonds, called 77s because of their 1977 maturity date, may, in the future, be settled between 26 cents and 48 cents on the dollar, giving speculators a potential return of 180 to 490 percent. And yes, the 77s could be an excellent speculation, though too rank for my blood. But you can't buy those bonds, because a silly 18-year-old statute prevents U.S. citizens from investing in or owning Cuban assets. (Americans can own assets in Syria, Somalia and Iran, but they can't own Cuban assets.) The ban can be lifted by Congress, but Miami's ridiculously bombastic and sadly confused Cuban community continues to define U.S. policy regarding Cuba and won't allow it.
A legitimate way to own the 77s is to purchase the unimpressive Herzfeld Caribbean Basin Fund (CUBA-$9.27), a $27 million closed-end fund that owns, among other Latin investments, Cuban bonds with a $1.6 million face value. A reader whose family lives in Canada told me that his brother purchased the 77s in his Canadian brokerage account. Canadians have been allowed to travel to Cuba for years. Fortunately, Canada's policy regarding Cuba is not determined by a warren of rabid expatriates residing in Miami who live in their memories of the past 56 years. If you have a relative in Canada, he can purchase the 77s for you, but be mindful that family members are often the worst people with whom to conduct a business transaction. And recognize that this transaction would also involve currency risk as you convert U.S. dollars into Canadian dollars to buy the 77s. There would be additional currency risks when selling the 77s, because you would need to convert Canadian dollars back into U.S. dollars.
Current law dictates that before the U.S. can lift its embargo against Cuba, that nation must reach a settlement with U.S. corporations whose businesses were seized by the Castro government in 1960. If Cuba wishes to become a player in the world of finance, those business debts must be settled by the London Club. Then Cuba must engage the Paris Club to negotiate bond settlements between Cuba and other governments that have lent money to Cuba. There's quiet talk that Raul Castro has met with Paris Club and London Club members, which is why there seems to be an interest in the 77s.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.