The Taiwanese Debt Trap
How Taiwan weaponised a loan contract against Grenada while it was reeling from its worst economic crisis.
AidData recently published a detailed report titled ‘ How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments’. The report prompted many journalists from the typical places ( FT, Axios,) to condemn Chinese loan agreements.
I could not help but muse upon the only instance of a bilateral loan contract being weaponised in the Caribbean. It was not done by China, but by Taiwan.
After Grenada switched diplomatic relations to China, the government of Taiwan retaliated by suing Grenada in US courts — while preventing a much needed debt restructuring program.
It was a spiteful decade long battle.
Firstly, some background information is needed for context. Grenada is affectionately called the ‘ Spice Isle ‘.
Size: 348 km²
Population: 112,000
GDP: $1.2 Billion USD
Grenada is the world’s second largest producer of nutmeg after Indonesia. In 2002 the crop accounted for 22% of Grenada’s exports. Since the early 2000s Grenada suffered a series of economic shocks. After the 9/11 terrorist attacks in the USA the tourism market in Grenada suffered.
- The fiscal deficit in 2002 increased to 14.5% of Grenada’s GDP (in previous years the fiscal deficit was around 2.5% of GDP)
- At the end of 2000, the debt-to-GDP ratio hovered around 41% but by the end of 2002 it was 79%.
Then in 2004 Grenada’s economy convulsed after taking a terrible hit from Hurricane Ivan.
- The damage was estimated to be over 200% of GDP.
- Over 90% of homes were damaged or destroyed.
- According to government reports around 50% of the population was left homeless.
For many weeks utilities such as water, electricity, and telecommunications were unavailable. Hurricane Ivan also wiped out the entire nutmeg crop.
I was still in primary school around this period and I recall relief efforts to collect supplies for the children of Grenada.
Debt Restructuring — First Attempt
Understandably, Grenada’s government halted debt repayments as revenues plummeted by 47%. By the end of 2004 the debt-to-GDP ratio increased to 95%. Then the following year, without anytime to recover, Hurricane Emily slammed Grenada; furthering country-wide damage amounting to costs of 2% of GDP.
At this point it was clear that Grenada had neither the short-term liquidity nor the medium-term fiscal capacity to service its debt repayments to external creditors.
In 2005 the government attempted a debt restructuring program with its major creditors. This would allow Grenada to reschedule its payment commitments and give the country some fiscal wiggle room to manoeuvre and rebuild.
However, the situation did not improve. Following the 2008 global financial crisis, Grenada’s debt-to-GDP ratio ballooned to 107%.
Grenada was in dire circumstances. Most of the country’s creditors agreed to the terms of a debt restructuring program, save for one; Grenada’s largest official bilateral lender — Taiwan.
Grenada established diplomatic relations with China (PRC) in 1985. But in 1989 China terminated that relationship when Grenada chose to establish formal relations with Taiwan (ROC). Relations remained with Taiwan until January 2005 when Grenada switched back to China.
While Grenada still had diplomatic relations with Taiwan, the Export-Import Bank of Taiwan (Ex-Im Bank) provided loans to Grenada on four occasions:
By 2004, Taiwan was Grenada’s largest individual bilateral creditor accounting for 12% of total debt.
- 85.4% of the debt was owed to private bondholders
- 2.6% of the debt was owed to Paris Club lenders (France, Russia, UK, and USA)
After Hurricane Ivan in September 2004, Grenada sought assistance from China to help rebuild the country. In December, Prime Minister Keith Mitchell flew to Beijing on a 5 day trip. By January 2005 the diplomatic switch to China was official. This particularly quick decision was made, in my opinion, out of desperation. Grenada was not getting sufficient financial recovery assistance from its usual partners (USA and UK in particular). China had agreed to assist with rebuilding houses and constructing new facilities such as a hospital and sports stadium.
Taiwan did not take the news of the switch well. It was reported that the Taiwanese foreign ministry accused Grenada’s leaders of “extortion-like behaviour”, because Grenada allegedly made demands for Taiwan to provide USD $245 million. PM Mitchell responded that these accusations were a “blatant lie”. Taiwanese newspapers also repeated unsubstantiated news coverage which accused Grenadian government leaders of taking bribes from China via the Red Cross.
Grenada eventually defaulted on its loans from Taiwan since the creditor refused to participate in the debt restructuring program.
Instead, without any compassion, Taiwan sued Grenada in 2006 to recover the outstanding loan payments in full and immediately.
Thus began the decade long debacle.
Taiwan sued Grenada in the United States District Court for the Southern District of New York; being the jurisdiction agreed upon in the loan contracts.
Further, the Ex-Im Bank loan contracts included a clause requiring Grenada to waive its sovereign immunity from suits in the US related to the loans:
[Grenada] represents and warrants that this Agreement and the Loan being made hereunder is a commercial . . . act and that the Borrower is not entitled to claim immunity from legal process with respect to itself or any property owned by it . . . on the ground of sovereignty . . . [and] [t]o the extent that [Grenada] or any property owned by it . . . has or hereafter may acquire any right of immunity from . . . attachments or execution of judgment . . . [Grenada] hereby irrevocably waives such right to immunity for itself and such property . . . . [ Loan Agreement § 9.06, Dist. Ct. Dkt. №9, Ex. 4. Quoted in 12–2619cv Export-Import Bank of the Republic of China v. Grenada]
Ironically, a similar clause was pointed out by journalists to be an example of unfair legal treatment from China, when providing loans to the Caribbean. Yet, it is fairly standard.
The case was initially ruled on summary judgement in March 2007 in favour of Ex-Im Bank. The District Court ruled that Grenada was required to pay Taiwan $21,586,057.38 USD plus interest and attorney fees. In total this comes to around $32,000,000.00 USD.
But after the court ruling Grenada did not pay anything to Taiwan. Grenada’s economic position was indeed not in any state of material recovery.
Taiwan kept pushing.
In 2011 Taiwan served restraining notices on Grenada’s assets in the United States. In effect, Taiwan attempted to obtain any assets owned by or owed to Grenada from any entity in the US.
This was in two forms:
- Taiwan issued notices to airlines, cruise ships, and shipping companies in the US that did business in Grenada, claiming that the money they would have paid to Grenada should now be paid to Taiwan (via Ex-Im Bank).
- Taiwan sought to obtain the funds which the Grenada government won in a separate international arbitration case involving a corporation owned by the Grynberg family (about $300,000 USD, the “Grynberg funds” ).
From November 2011 all of the above firms stopped making payments to Grenada. They did not transfer the funds to Taiwan — they simply stopped making payments until there was a legal clarification. As you can guess this was another pronounced blow to Grenada.
By March 2012, Grenada filed claims in the District Court (New York) again to have Taiwan’s restraining notices voided. To which, of course, Taiwan filed counterclaims.
But by June 2012 the District Court ruled in favour of Grenada; voiding Taiwan’s restraining notices on the aforementioned companies and declared that the ‘Grynberg funds’ are immune from being sought after by Taiwan.
The court based its ruling on its interpretation of the US Foreign Sovereign Immunities Act (FSIA) which stipulated that the funds owed to Grenada were still covered by sovereign immunity.
The only way that sovereign immunity could be waived (as per the Loan Agreements) is for funds that are strictly used for “ commercial activity in the United States.”
Taiwan did try to argue that these funds under restraining notice should be categorised as “commercial activity”, but the court disagreed categorically. Grenada was finally able to receive the Grynberg funds and the payments owed by the companies previously under restraining notice.
However, this wouldn’t be the end.
Later in 2012 Taiwan appealed the decision, claiming that the District Court was wrong to declare that the restrained funds were immune due to the FSIA.
But the United States Court of Appeals for the Second Circuit affirmed the District Court’s ruling in Grenada’s favour.
At this point Taiwan approached Grenada to settle the case amicably.
Taiwan (via Ex-Im Bank) agreed to the restructuring of around $36.6 million USD of debt owed by Grenada. In particular, Taiwan agreed to the following:
- Reduce the principal of the debt by 50%
- Reschedule the debt to be repaid over a 15 years period with a 3.5 years grace period
- Institute a fixed rate of interest at 7%
- A new clause stating that payments can be halted in case of a hurricane (the “Hurricane Clause”)
This Hurricane Clause is the very first time a natural disaster was included in a debt restructuring agreement and it has set precedents for similar clauses globally. Taiwan should be lauded for agreeing to it. In fact, all of Grenada’s creditors agreed to this clause with some variation.
After a decade long legal battle with Taiwan that prevented a robust debt restructuring program, Grenada was finally able to restructure its debt in 2015.
- Journalists, think tankers, and policy makers from DC to Brussels warn Caribbean countries about the supposed dangers of taking bilateral loans from China. This narrative is worn out.
- Foreign altruism is a myth. Taiwan as a “democratic ally” pulled the rug from under a partner and attempted to beat them with it.
Check out Episode #15 of the China in the Caribbean Podcast! In this episode I am joined by Barbados’s Ambassador to the People’s Republic of China, His Excellency Ambassador Francois Jackman. We discussed several major foreign policy and geopolitical themes centred on the Caribbean’s diplomatic posture towards China and the North Atlantic. Share China in the Caribbean
Originally published at https://chinacaribbean.substack.com.