Financial crisis one more woe for beleaguered Cuba

HAVANA (Reuters) - The global financial crisis has dealt another blow to communist Cuba, already reeling from two powerful hurricanes and soaring import prices, and it could force the government to speed up reforms, Western diplomats and businessmen say.

The crisis has made credit tighter and softened demand for nickel, the island's key export. It could also slow tourism revenues and financial support from family members living abroad.

It comes at a particularly bad time for Cuba, where there were already signs of a mounting foreign exchange shortage before the crisis surged on Wall Street and hurricanes Ike and Gustav caused at least $5 billion in damage, equivalent to more than 10 percent of Cuba's gross domestic product.

Cuban President Raul Castro warned the country starting in mid-summer that belts would have to be tightened because of rising costs for fuel and food imports.

At the same time, the government began taking steps to ease its financial crunch, said one businessman, who like others interviewed, requested anonymity.

"First they insisted suppliers allow 360 days for payment instead of 180. Then they told some suppliers and creditors they needed to restructure debt," he said.

Even before the two hurricanes struck within 10 days of each other starting on August 30, at least one Spanish bank had stopped handling letters of credit for Cuba deals.

CRISIS AND OPPORTUNITY

Some of Cuba's payment problems have been settled or are being worked out now, sources said, but the availability of future credit for Cuba is in question because of the crisis.

"Credit has always been hard to come by and expensive because of their payment history and U.S. pressure. It's hard to see how it could become that much worse, but who knows," a European economic attache said.

Cuba, under U.S. economic sanctions for decades, is not a member of the International Monetary Fund or any other multilateral lending organization. The country has a Moody's rating of Caa1, or speculative and poor.

How much worse an already difficult financial situation might become will depend on support received from oil-rich ally Venezuela as well as China, and the Cuban government's willingness to push ahead with economic reforms, the sources said.

When Raul Castro officially replaced ailing brother Fidel Castro as president in February, he instituted some small changes such as the opening of cell phone and computer sales to the public and began broader reforms in agriculture.

The changes raised hopes, so far unfulfilled, of more reforms to modernize Cuba's state-run economy.

"If Cuba quickens reform, for example opening up the retail sector to private individuals and cooperatives, that would help domestically and be a positive signal even to China," said a leader of the organization of Spanish companies operating in Cuba.

The financial crisis also could provide an opening to renegotiate some of the debt hanging over Cuba's economy, diplomats said.

Cuba's central bank has told creditors the country's foreign debt increased by $1.1 billion in 2007 to $16.5 billion.

"In every crisis there is opportunity, and a possible solution would be for Cuba to negotiate its debt with the Paris Club," another European diplomat said.

Official talks with the Paris Club of rich creditor nations were broken off in 1989, then resumed in 2000 only to be broken off again.

At the time some $20 billion in debt owed the Soviet Union and claimed by Russia proved a major stumbling block. The Soviet debt issue has since been dealt with bilaterally.

(Editing by Jeff Franks and Kieran Murray)