Treasury's $1 Billion Castro Bailout

Monday, December 27, 2010
Last week, the Treasury Department authorized Western Union to send remittances to Cuba in the Castro regime's convertible pesos (CuCs), instead of in U.S. dollars.

At first glance, this might seem like a bad deal for the Castro regime, as it would lose the 10% exchange fee it charges to convert U.S. dollars into CuCs.

And it very well might be a bad deal for the regime -- in the long-term -- which then leads to the question:

Why did the Castro regime agree to this new arrangement?

In a nutshell, because the regime is suffering from a severe short-term liquidity crisis and this arrangement amounts to a cash windfall -- potentially worth $1 billion.

To elaborate -- when dollar remittances are sent to Cuba, the Cuban national that receives the dollars might take months to exchange them, if at all. That means the Castro regime is not immediately guaranteed the high exchange fee.

Through this new arrangement, Western Union will exchange these dollars up front, which the regime desperately needs to meet its debt payments. Remember that last year the regime froze over $1 billion in the Cuban bank accounts of foreign companies (mostly Spanish), not to mention the nearly $4 billion debt it has recently incurred with China.

Thus, the Castro regime is willing to potentially risk a long-term loss for a short-term bailout.

The regime also figures that this new arrangement can lead to an overall rise in remittances, as senders and recipients will initially think they are saving the 10% exchange fee. However, the regime can compensate by raising prices at state-owned CuC-denominated stores by 10% -- for CuCs are worthless anywhere else.

As we learned from the recent special report (below) in The New York Times -- Congress enacts sanctions laws and Treasury finds harmful loopholes.