Corruption, poor investing
have bankrupted Nauru
When the Pacific island of Nauru, the world's smallest republic by area, needed a $160 million mortgage in 1998 for its real estate holdings in Australia, it turned to the world's largest company by market value, General Electric Co.
In January, Nauru's government defaulted on the loan. And in April, General Electric's real-estate unit asked receivers to sell Nauru's Australian shopping center, office building and hotels. They are worth an estimated $200 million -- the most valuable asset for the island's 12,000 residents.
The enforced sale may be the final chapter in a riches-to-rags story of what was one of the world's wealthiest nations. Failed investments by Nauru's government-controlled trust, which included a London musical about Leonardo da Vinci that closed after five weeks, have cut gross domestic product to $5,000 per person from about $50,000 in the 1970s. The central bank is broke, according to the Manila-based Asian Development Bank.
"They've blown close to $2 billion," said Helen Hughes, 75, a former World Bank economist who helped Nauruans negotiate prices in the 1960s for phosphate deposits that made them rich. A mix of calcified bird droppings and marine fossils, the phosphate, used as fertilizer, is now mostly mined out.
Concerns are mounting that a bankrupt Nauru may resume selling banking licenses and passports. The 8-square-mile Polynesian island remains on the Organization for Economic Cooperation and Development's money-laundering blacklist after issuing 400 offshore banking licenses in the mid-1990s.
On May 20, Nauru's opposition party asked for a parliamentary probe into claims by a lawmaker, Fabian Ribauw, that passports are still being sold by "high government functionaries and public servants" for as much as $50,000 each.
Mafia 'laundered billions'
Nauru's financial crisis could become a regional security issue, said Steve Vickers, president of International Risk Ltd, a Hong Kong-based consulting firm."Failed states become used by terrorists and criminals," Vickers said. "When countries are desperate, they will do desperate things."
The Russian mafia laundered billions through Nauru in the 1990s, said Hughes, now a senior fellow at the Centre for Independent Studies, a Sydney-based research group.
Even PPB Group, the Sydney-based receiver appointed to sell the properties by Stamford, Conn.-based General Electric Real Estate is proceeding "cautiously," according to Steve Parbery, a partner. "Nauru has a history of engaging with agents of curious background and credibility," said Parbery, 52.
Nauru President Rene Harris and Finance Minister Kinza Clodumar are trying to arrange refinancing of the loan, according to Helen Bogdan, 58, a Melbourne-based Nauru government spokeswoman.
Government crisis
Both men have been in Melbourne since April 29, when Harris concluded a state visit to China. They're working from offices in the country's consulate atop 51-story Nauru House -- one of the properties now in the hands of receivers, said Bogdan. Harris, 57, and Clodumar, 56, declined to be interviewed for this article.
"I wouldn't deny there has been corruption and bad management," Bogdan said. Some foreigners abused the offshore banking facility, though "Nauru didn't benefit one iota," she said. The country no longer sells passports, according to Bogdan.
The situation is complicated by a political crisis. Nauru's 18-member parliament has been stalemated since March, when the speaker defected to the opposition, giving pro- and anti-government forces nine votes each. Since then, no budget bill has been passed.
Government worker salaries are 11 months and $17 million in arrears, said Kieren Keke, 33, an opposition lawmaker who is also the island's director of medical services.
Only government payment from Australia, 3,000 kilometers away, is saving Nauru from collapse, according to the Asian Development Bank. Australia began paying Nauru $7 million a year in 2002 to temporarily house on the island asylum-seekers who had tried to enter Australia illegally on boats.
"The situation on Nauru is dire," Keke said. "It's been caused by a combination of mismanagement, foolish investment, ignorance and corruption."
Refinancing unlikely
The island's leaders are unlikely to gain refinancing for Nauru's Australian properties, said Parbery, the receiver. Asian Development Bank estimates show the properties are mortgaged to 83 percent of their value.When the loan became due in January, General Electric agreed to extend payment by 120 days before appointing receivers, said Karen Donaldson, the company's Melbourne spokeswoman.
Company officials also met Nauru leaders Harris and Clodumar. "GE has been working over an extended period of time with Nauru to resolve this matter," Donaldson said.
The property holdings comprise three Australian hotels, the Royal Randwick Shopping Centre in Sydney and the flagship Nauru House in Melbourne's financial center, which Nauru built in 1977.
The interest rate agreed was 8.985 percent over five years, with General Electric also receiving 20 percent of the increased value of the properties -- $12 million on top of the principal, Nauru spokeswoman Bogdan said. Nauru always hoped to be able to repay in full, she said. An Asian Development Bank report in April described the properties as "relatively expensively mortgaged."
General Electric's Donaldson declined to discuss the loan terms, citing client confidentiality. "It's very disappointing that a big American corporation like GE can bring so much difficulty to a small island state," Bogdan said.