Heres what you need to know about a blockbuster court

Here’s what you need to know about a blockbuster court battle over Cuba’s debt

A Cuban pilgrim takes part in the San Lazaro procession at El Rincon church in Havana on December 16, 2022.

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Allegations of bribery, a jailed Cuban bank teller and Interpol are the subject of a high-level case against the Cuban government due to start Monday in the UK High Court.

The lawsuit centers on some of Cuba’s unpaid commercial debts dating back to the 1980s. Ultimately, if Cuba loses, it could cost the island nation billions in long-overdue payments — and, at worst, result in the confiscation of state assets like oil tankers and incoming remittances.

The investment fund CRF1, originally called the Cuba Recovery Fund, is suing Cuba for around $72 million Principal and past due interest on two loans it now owns. They were originally granted to the Caribbean island state by European commercial banks in the 1980s and were denominated in the German D-Mark, which no longer exists.

This is the first time Cuba has faced a lawsuit valued at an estimated $7 billion over outstanding commercial loans dating back to the 1970s and 1980s. If CRF wins this case for this small chunk of this debt, it could lead to more lawsuits from creditors with claims in the billions. Unpaid judgments could result in confiscation of assets.

If no agreement can be reached, Cuba faces another court battle over whether it finally has to pay. If CRF is successful, it could result in many other creditors suing, with claims in the billions.

Cuba would not be able to borrow on the international capital markets until its debts are paid off. According to the World Bank, Cuba’s gross domestic product was $107 billion in 2020, slightly more than New York City’s budget. The country has managed to survive for decades on the generosity of other sympathetic governments: the former Soviet Union, Venezuela and China. But as Venezuela struggles financially and China faces a weaker economy, those lifelines seem increasingly unreliable.

Because of the US embargo on Cuba, American investors are barred from owning and trading in Cuban debt, frustrating some frontier market hedge fund managers in the US to sit at a future negotiating table.

An old American car drives past Bar Floridita in Havana on December 27, 2022.

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Trade debts aside, there are still nearly 6,000 outstanding claims from Americans and American companies whose property was confiscated by the Cuban government after former leader Fidel Castro came to power in a 1959 coup.

John Kavulich, longtime head of the US-Cuba Trade and Economic Council, a private, nonpartisan nonprofit, says the lawsuit “could prove stimulating” for the US and Cuban governments to “seek a settlement for the 5,913 claims in the Value of $1.9 billion to negotiate. “

details of the case

The process is expected to take eight days. It will contain long-distance testimony from a jailed former Banco Nacional de Cuba employee, Raul Eugenio Olivera Lozano.

According to documents filed in the case, Lozano is serving a 13-year sentence after being convicted in Cuba of accepting more than $25,000 in bribes in exchange for processing paperwork that made it possible to transfer the Chinese-owned loans in question to CRF-standard ICBC bank.

In filings with the court, CRF says the bribery allegations are “silly” and that Lozano was run over by the Cuban government to avoid having to repay the loans. Human rights organizations have long criticized Cuba for arbitrary detention and a lax rule of law. Both Amnesty International and Human Rights Watch describe it as one of the most repressive regimes in the world.

There are other costs to consider as well. To date, the Cuban government has spent approximately $3 million on legal fees in its defense and the plaintiffs have spent approximately $2.6 million. In the UK, the loser pays the winner’s legal fees, so one of the parties will lose almost $6 million.

Cuban officials and their attorneys declined to comment.

Jeet Gordhandas is also expected as a witness. He is a representative of CRF who, according to the plaintiffs, was prevented from entering the country Mexico after the Cuban government, through Interpol, issued a “red notice” for his arrest, alleging he initiated the bribery.

Cuban boxers prepare for their bouts in the first official women’s boxing program in Cuba, December 17, 2022, at the Giraldo Cordova boxing school in Havana.

Yamil location | AFP | Getty Images

In more recent files, the Cuban government appears to have backed down on the bribery allegation. Instead, it is argued that the bank directors, who facilitated the restructuring, did not have the authority to do so.

Cuba also argues that CRF, which is registered in the Cayman Islands, is a “vulture fund that invests in distressed Cuban sovereign debt for enforcement purposes.” David Charters, the chairman of CRF, repelled: “Characterizing us as a vulture fund is a gross misrepresentation on our part.”

CRF, meanwhile, says in court filings that it first approached Cuba to pay off the debt 10 years ago, but was ignored. The fund also says it did not file a lawsuit until it made several attempts to meet with Cuban authorities over the decade.

In 2018, CRF says in filings, the fund offered the Cuban government a better deal than the one the country made in 2015 with bilateral creditors for billions in unpaid debts. Cuba also ignored this overture, according to the CRF. Bilateral loans are government-to-government loans.

CRF would rather not go to court, Charters said in an interview days before the trial.

“We are trying to engage Cuba at this late stage as well. Even today we are ready to speak,” he said. “You make offers and nothing happens, you’re either ignored or turned down, so what do you do? It’s been a decade.”

What happens to irrecoverable old debts?

Defaulted loans are traded on the secondary market. There are investors who specialize in buying them at discounts to the face value of the loan and then negotiating with the relevant government to finally settle them. Usually it is at a discount to the face value and part of the overdue interest.

Often the settlement is not in the form of cash, but in the form of another long-term financial instrument. An example is a GDP warrant, which is paid out based on the growth level of a country’s GDP over an extended period of time.

GDP warrants were used in Greece’s 2012 debt restructuring. Sometimes debts are settled through a debt-for-equity swap, in which the creditor receives a franchise or ownership of a government property, such as an airport or port. Creditors receive a share of the proceeds from the assets.

For decades, Cuban debt has traded at around 8 to 10 cents per dollar, with occasional spikes caused by events such as 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 in hopes that an agreement was more likely.

Getting paid on very old, defaulted debt is not without precedent. Iraqi debt traded between 8 and 10 cents on the dollar for a decade and then settled at about 32 cents on the dollar after the US invasion in 2003.

Although Cuba’s defaulted debt is almost 40 years old, there is precedent for bondholders waiting even longer. More than 300,000 holders of Tsarist-era Russian bonds on which the Bolsheviks defaulted after the 1917 revolution received payments in 2000.

Michelle Caruso-Cabrera, a CNBC contributor, has 30 years of experience at the intersection of finance, economic development and communications.