Page last updated at 14:20 GMT, Thursday, 24 September 2009 15:20 UK

Cayman Islands fears as debts grow

By Michael Buchanan
BBC News

Beach in the Cayman Islands
The Cayman Islands: Long-running prosperity under threat?

As the G20 nations prepare for their meetings in Pittsburgh, the consequences of one of their campaigns, against offshore tax havens, is leading to a stand-off between Britain and some of its overseas territories.

At around the same time as the world's most powerful leaders gather in the US, the head of one of the world's smallest nations, the Cayman Islands, will address his people to tell them how he intends to solve their financial worries.

Such is the depth of their problems that the Cayman Islands face having a major construction project frozen this week as they have not paid the contractor.

As things stand, the Cayman Islands government cannot borrow any more money to pay debts as it has hit its borrowing limits, which means it now has to get permission from the UK Foreign Office to borrow any extra money.

The Foreign Office is willing to let them do so, but only if they introduce direct taxation, something the Cayman leader, McKeeva Bush, is wholly opposed to.

"There will be no income tax; there will be no property tax. We are not asking the United Kingdom for anything. I wouldn't expect the UK to give me anything; I wouldn't expect their taxpayers to pay for anything in the Cayman Islands," said Mr Bush.

The Cayman Islands, along with Anguilla and the Turk and Caicos Islands, have been hit not just by the campaign against tax havens but also by the global recession, which has led to a dramatic fall in tourists.

Anguilla has also hit its borrowing limits and is warning that it soon may not be able to pay its civil servants.

It's absolutely important... that those countries have a sustainable economic base for the future and can pay their bills
Chris Bryant
British Foreign Office Minisiter

An official report released earlier this month in the Turks and Caicos - which is currently being run directly by London after the governor sacked the government over allegation of corruption - found that the islands have "no known financial assets of any kind and owes $135m (£84m)".

"The problems are quite serious and are potentially going to get worse," says Professor Peter Clegg from the University of the West Indies.

"The basic problem is these countries are vulnerable to external factors including hurricanes but also recessions. So basing their economies on financial services and tourism, which are taking a serious hit at the moment (is leading to) serious budget problems."

Bankruptcy fears

It is in part with an eye on their long-term viability that the Foreign Office recently wrote to the Cayman Islands, warning them that they should not assume that their future prosperity can be based on being an off-shore tax haven.

Foreign Office minister Chris Bryant says the advice to the Cayman government extends to many of Britain's overseas territories in the Caribbean.

Cayman leader McKeeva Bush
McKeeva Bush is opposed to direct taxation

"I think it's absolutely important that those countries have open tax agreements with other countries, that they have a sustainable economic base for the future and that they can pay their bills," Mr Bryant told the BBC's World at One.

"I don't think it would be right for British taxpayers to be forking out for people who hadn't managed to manage their budgets properly in the overseas territories."

Those final comments go to the heart of one of the UK government's chief concerns - that an overseas territory will go bankrupt.

A report, commissioned by the Treasury and due to be completed next month, will look at the likelihood of such a scenario and set out the steps the government need to take to ensure that scenario does not arise.

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