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Old 10-07-2009, 10:13 AM
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Mary Pat Campbell
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Default Non-surprise: trouble in the Cayman Islands

In recent years, these pleasant Caribbean islands have prompted ire from social justice groups – and some western finance ministries – by playing host to numerous hedge funds and other financial vehicles. As an offshore centre, the Cayman Islands have been a handy place for financiers when they did not want to pay onshore taxes.

But now the Cayman Islands are in crisis because they are running short of, er, tax revenues.

Last week its government secured a £38m ($61m, €42m) loan to prevent an immediate fiscal crunch. However, the UK government – which runs the external affairs of this British overseas territory – has told the Cayman government it must implement fiscal reforms urgently.

Most notably, London is urging the Cayman Islands to widen its own tax base. That has some intriguing implications – not just for the Caribbean, but for the western world too.

The roots of the Cayman crisis lie in a combination of rising public spending and falling revenues. For the first seven years of this decade, the islands’ budget was in rude health, since hedge funds were flocking to its shores. Indeed, the Cayman government was feeling so upbeat that it embarked on a big programme of public spending.

But the bill for that public spending is now coming due, just as tax revenues are tumbling with the decline in tourist and hedge fund activity. For, while hedge funds have not hitherto paid direct taxes (say, in the form of capital gains tax), they used to generate activity that was taxed. Car import duties, for example, were previously a key source of revenue (hedge fund types apparently import a lot of cars).

That has consequently produced a big hole. On June 30 this year, the country had a cash deficit of CI$81.1m ($100m, £63m, €69m), while the proportion of net debt to revenue was running at 86 per cent (above a UK-imposed cap of 80 per cent). As a result, in late August, the government stopped paying its suppliers.
More at the link. Wow, sounds a lot like California, huh?

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Old 10-07-2009, 02:32 PM
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Cash deficit of $100M? With 50,000 people that is $2000 per man, woman, child.
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