The Guardian’s editorial this morning picks up the Cayman theme. Normally I won’t reproduce whole stories for copyright reasons, but since I gave them this exclusive I trust they’ll forgive me:
Gustav, Ivan, Paloma: the Cayman Islands have withstood many a hurricane. Now, however, it faces the perfect storm: Hurricane Lehman. This one has been brewing since September last year, when America's Lehman Brothers went belly-up and brought the global banking crisis to its climax. The Cayman Islands relies for income on financial services and tourism, so it has suffered terribly ever since. And now the country, home to trillions of dollars of assets held by hedge funds and multinational businesses, has run out of cash.
A budget black hole means that civil servants are no longer getting all their pay and the government is considering imposing new taxes on islanders. First, though, it is trying to raise emergency funds from banks. To do so, the British overseas territory needs to gain permission from their ultimate masters at Westminster. And there lies the rub. Writing to the Cayman government's leader last week, Chris Bryant declined the request, and pointed out that the islands' entire business model was bust. That is a sound judgment: the US and other economies remain weak, hedge funds and the rest of the financial services industry are still getting over the worst market crisis in decades, and secretive tax havens such as the Caymans are under pressure from the OECD and the G20 group of rich countries to become more transparent. The same diagnosis surely applies to Jersey, Guernsey and the Isle of Man. As Mr Bryant says: "It would be unwise ... to expect that the Cayman Islands' prosperity can presume on an offshore tax haven status."
The palpable relish in that sentence is surely no accident. For those like The Guardian who want a more open and fairer tax system, this is a moment rich with possibilities. Not only is pressure building on the G20 leaders to tackle tax dodgers, but the world's boltholes for the rich are finally learning that tax avoidance does not pay. As more British dependencies have to call on ministers for assistance, Westminster can demand they clean their act up.
Let ministers start with the Caymans. As a condition for acceding to another loan, they can demand that the islands' government institutes automatic exchange of tax information with all countries, rich and poor alike. They can also request that no taxes are introduced that hit the Caymans' poor while letting off the wealthy. The Cayman government should not tax money sent home by relatively hard-up immigrants, for example. Finally, Westminster needs to work with the Caymans on making its economy less reliant on passing cruise ships and fly-by-night financiers. As the UK government also knows, a lopsided economy will always eventually crash.
I’m delighted to see they have picked up themes from this blog.
And that they have realised this is an issue for Jersey, Guernsey and the Isle of Man as well.
Is this a tipping point? I genuinely don’t know. But I do hope so.
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Scary stuff. Great stuff.
If they do eventually decide to tax the FS industry there to solve the problem, and the money flees, might that not strengthen other tax havens?
Mike
Yes, temporarily
But I mean that temporarily bit
The world is finite
We will win this one
Richard
Please correct me if I am wrong Richard, but didn’t Guardian Media Group avoid a £600,000 tax charge on the acquisition of Auto Trader by the use of a Cayman incorporated acquisition vehicle, namely GMG Hazel Acquisition 1 Limited?
Yes
The paper has criticised its own group for that
So do I
The paper “criticised its own group”.
Well, that must have taken journalistic courage. To pander to your audience while continuing to work for a system you profess to despise. Champagne anyone?
How do these people sleep at night? And how daft must their readers be?
Richard, can you enlighten me as to the exact nature of the loan the Caymans are asking for? Are they asking for permission to borrow from a bank or for actual funds from the UK government? The article doesn’t make it entirely clear.
It’s a bank loan
But UK is effective guarantor
Richard
Um, no it isn’t. Cayman is an Overseas Territory not a Crown Dependency, and is covered by the 1999 agreement on Overseas Territories (online here:
http://collections.europarchive.org/tna/20080205132101/fco.gov.uk/Files/kfile/OT6.pdf)
which contains the following instructions (“We” is the UK Government):
“We will provide neither explicit nor implicit guarantees for commercial borrowing by Overseas Territory governments. When negotiating borrowing arrangements Overseas Territory governments should not say or do anything which is likely to be interpreted as suggesting anything to the contrary.”
Overseas territories are required to agree borrowing limits with the UK and may only borrow on terms consistent with the 1999 paper.
Cayman debt is rated AA3. It would be rated AAA with a UK Govt guarantee.
The National Audit Office report of 2007 contradicted that and says the risk does fall to the UK
The minister would know that
I am sure I am right
Richard
Um, no it doesn’t. The NAO report (online here:
http://www.nao.org.uk/publications/0708/managing_risk_in_the_overseas.aspx)
follows the line of the 1999 paper and contains the following risk analysis regarding borrowings:
“1.5 Territories (except Gibraltar) are required to obtain approval by the Secretary of State when seeking to borrow. This is to ensure that they evaluate borrowing proposals fully and do not take on commitments which would be burdensome or which might ultimately constitute a liability for the UK. The Department also requires Territory governments to keep within agreed levels of indebtedness and to maintain sufficient liquid reserves to cover 90 days of government spending, before it permits further borrowing. With the exception of Anguilla and Turks and Caicos Islands, which have not managed to meet the liquid reserve target, Territories are keeping within these guidelines.”
It follows that any borrowings in compliance with the agreed guidelines would have neither an implicit nor an explicit guarantee from the UK government.
As I said before, if there was any such guarantee, Cayman debt would be rated AAA rather than AA3.
Exec Summary says:
Over the years the UK’s exposure to risk has been varied,
including; contributing to the costs of natural disasters
and of meeting various international obligations; funding
liabilities and deficits in Territories’ public finances; and
the need to bolster regulation in vital areas like transport
safety and security. Other areas, such as the regulation
of offshore financial services, clearly pose important
and growing risks, though these have not yet resulted in
direct costs to the UK.
I.e. the UK does in practice think it is liable for deficits
Please do remember the law is not a good guide to fact
The substance is the UK knows it is liable, whatever the legal form
“The substance is the UK knows it is liable, whatever the legal form”
Not at all. The “risks” in the NAO report are the risks that the UK must take if it wants to continue to hold Overseas Territories for whatever political, military or other purpose, which would include ensuring that there is democratic governance and a contented populace. If a government overspent that might entail bailing out some creditors, most likely unpaid public servants and other local trade creditors, but the UK would be under no obligation to bail out any financial creditors who could be told to reschedule payments, the usual recourse for defaulted government borrowings.
You obviously know very little about finance because there is a world of difference between the risks described in the NAO report and any implicit or explicit guarantee from the government which a lender could call upon to be repaid in full on a default by the Cayman government.
I don’t think that the lenders would go so far as to say that British policy amounted to so much as an implicit letter of comfort. The policy disclaims all UK liability for borrowings. It stipulates that borrowing should be made for prudent purposes, but it omits to mention that the UK will ensure that Overseas Territories will take any particular measures to ensure that lenders are repaid on a timely basis, which would be the normal understanding in a comfort letter.
As all ready mentioned twice before if the substance was a UK guarantee, Cayman debt would be rated AAA not AA3.
Alex
Yes you’re a lawyer
So what?
The real world rarely relies on contracts – and the Uk would have to bail out
That’s the reality
That’s why it retains approval right
In which case you can fine tune your argument forever – but I am talking about reality – you about a state in your mind
Richard
A gross insult. There is no need to get personal.
The position of the UK government is little more than that of a concerned parent relative to their progeny borrowing the car. The parent is concerned that the child drives carefully but is not going to be laible if the child has an accident.
The advantage to the Overseas Territories is that the UK approval gives an assurance that the borrowing is reasonable in its terms and purposes. The UK and other developed nations in similar positions are keen to help these dependent countries develop, and part of this development involves getting the countries to stand behind their own borrowings. Default on debts is usually regarded as a development failure.
Well, my question concerning the loan the Caymans want seems to have opened up quite an argument, from which I gather the UK government is not being asked directly for money, but is entitled to refuse the Cayman’s permission to approach a bank for a loan if it feels the Caymans are a poor credit risk, as in:
“1.5 Territories (except Gibraltar) are required to obtain approval by the Secretary of State when seeking to borrow. This is to ensure that they evaluate borrowing proposals fully and do not take on commitments which would be burdensome or which might ultimately constitute a liability for the UK.”
Which is presumably why the UK government has done exactly that, and refused the Caymans permission to borrow to shore up their crumbling public finances, since such a commitment could end up as a liability for the UK i.e we’ll end up bailing them out.
@SickofTaxDodgers
“Which is presumably why the UK government has done exactly that, and refused the Caymans permission to borrow to shore up their crumbling public finances, since such a commitment could end up as a liability for the UK i.e we’ll end up bailing them out.”
Then you are presuming rather a lot. The Caymans have a per capita GDP about twice that of the UK, virtually no debt at the moment (4% of GDP). They are more likely to be bailing us out because we are due to borrow about 60% of our GDP in the next 4 years. This is just opportunism on the part of the UK to exert some political pressure on the Cayman regarding their tax system.
shore up their crumbling public finances
Hardly crumbling, just a short term shortage due to the previous government over extending on capital projects (which may have been a better time for the UK Governer to step in)
In fact I can assume that due to the UK’ debt levels and that of other OT’s at this time that the FS in Cayman assumed that permission would be granted, aftre all everyting was in place already and the Jr FCO minister attempted to pull the rug out from under Cayman.
It really does make you wonder about their intentions, especially after the UK gov acting in similar motives with the IOM and using an anti-terrorism law to try and bankrupt them.
I’m sure Mec Vannin is pulling in supporters
Ny Sostynee custhey!