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Deficit rising, central bank issues 20-year bonds.

Cuba will emit 20-year sovereign bonds to cover its widening budget shortfall in 2014, Finance Minister Lina Pedraza told the National Assembly.

The 2.5-percent, 20-year bonds will be negotiable instruments that can be transferred from one Cuban bank to another, when necessary, Pedraza said, without providing any details.

The debt instruments will be traded among Cuban banks only, according to a former Central Bank economist.

"This is a key step in granting autonomy to monetary policy in relation to fiscal policy," said Pavel Vidal, who now teaches at Universidad Javeriana in Cali, Colombia. "I think this is a very positive step to strengthen monetary policy, which is, in turn, key for the process of eliminating the dual currency system."

This fall, Cuba began the gradual elimination of the convertible peso, also known as CUC, to eventually remain with the Cuban Peso (CUP) only. Observers believe the complex process of devaluing the CUC and boosting the CUP may take at least three years.

The bond announcement comes as the officials forecasted a feeble 2.2 percent GDP growth rate for 2014.

The revenues from the bond issue will cover up to 70 percent of the deficit--forecasted at 4.7 percent of GDP in 2014--and the debt generated by it, Pedraza said, according to Prensa Latina. The remainder will be covered with new money printed by the Central Bank.

A bond issue will help control inflation more efficiently, Pedraza told the parliament.

"As only 30 percent of the fiscal deficit will be monetized, the Central Bank gains more control over monetary supply and inflation," Vidal said. "With monetization, money printing depends on the fiscal budget, and not on the instruments and decisions of monetary policy."

Foreign observers in Havana describe the move as a conventional strategy among tightly regulated economies to fund budget deficits. Even so, the fact that the government laid out the financing of the deficit is noteworthy.


Even if they were allowed to participate, international banks will keep their hands off Cuban bonds, suggests a foreign businessman in Havana who spoke on background. Another cash crunch is likely ahead as the budget deficit widens, and as long-time ally Venezuela is under pressure to reduce its commitments.

"No private institution would have any interest whatsoever," he said.

The Cuban government's access to fresh hard currency is very limited.

Since a default on foreign debt in 1986, Cuba has had to rely on bilateral government loans and high-interest bank loans for fresh hard currency. Due to U.S. resistance, the country is excluded from multilateral institutions and their lending mechanisms.

Foreign banks were only marginally involved in Cuba's recent effort to regain footing in international bond markets.

Seven years ago, the Cuban Central Bank dipped its toes in the Eurobond market on the London Stock Exchange with two batches of short-term issues. This was followed by five additional series of bonds in 2007 and 2008.

Only 15 percent of the two bond issues in 2006 were bought by international banks, mostly with a lending record in Cuba; the other buyers were Cuban state banks.

Year Duration Amount [euro] Interest

2006 1 yr 400m 7%
2006 1 yr 500m 8%
2007 2 yr 100m 8.5%
2007 2 yr 100m 9%
2008 2 yr 66.25m 9%
2008 3 yr 67.19m 9.25%
2008 4 yr 67.19m 9.5%

Source: LSE
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Author:Werner, Johannes
Geographic Code:5CUBA
Date:Jan 1, 2014
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