Fri, Aug 23, 2013 - Page 8 News List

War bonds are a ticking debt bomb

By Jonathan Levy

When the bonds were effectively put in cold storage in 1949, the economy of the embattled KMT-controlled Taiwan was minuscule and could not reasonably be expected to pay back the combined debts of a 60-year Chinese borrowing spree. Today however, the combined economies of the PRC and Taiwan are formidable. Poverty would not be a reasonable excuse if Article 63 were triggered by a KMT brokered reconciliation.

Institutions and banks have, at least publicly, written off the defaulted Chinese bonds long ago. The US Securities and Exchange Commission considers these bonds to be historical documents worth only what a collector would pay to a collectible bonds dealer, or on EBay, to own a bit of the past. Con artists have also used the bonds to defraud their victims.

On the other hand, the bonds were recently still trading on the Paris Euronext Exchange, albeit at a fraction of face value. The individual bondholders are a tenacious lot and have refused to accept that the bonds are unredeemable. The American Bondholder Foundation takes one tack claiming that the PRC will redeem the bonds on its own initiative. This is unlikely since the KMT, not the PRC, was the issuer, although the foundation has had enough pull to get several US congressmen to support their scheme.

Another large group of individual bondholders combined to sue the KMT in the Taiwan Civil Rights Litigation Organization (TCRLO) versus Kuomintang Business management Committee federal court case in California. Although the bondholders sought a default judgement backed by Article 63; the US court declined jurisdiction, citing too much time had elapsed from 1950. However, the bondholders did manage to bring forward Article 63 and obtain Cheng’s expert opinion.

The court, while dismissing the case as too dated, did not dispute the logic or lawfulness of the Article 63 reaffirmation. See Taiwan Civ. Rights Litig. Org. v. Kuomintang Bus. Mgmt. Comm., 2011 U.S. Dist. LEXIS 124812 (USDC ND Cal., Oct. 13, 2011); Affirmed by Taiwan Civ. Rights Litig. Org. v. Kuomintang Bus. Mgmt. Comm., 2012 U.S. App. LEXIS 21621 (9th Cir. Cal., Oct. 17, 2012).

How much debt is out there? Most bondholders agree the aggregate debt could be in the billions. Some of the bondholders are hoping for the full value of bonds, interest and penalties, all keyed to the value of the gold backing the bonds, an astronomical sum. Others are like the bondholders in TCRLO v. KMT who were seeking a more modest amount of interest dating from 1950 when the KMT put the bonds on ice.

No one would be happy with the small fraction of face value which was offered to British bondholders in 1997 as an accommodation to the UK government upon the transfer of Hong Kong to Chinese suzerainty.

A KMT-CCP accord on the mainland, however, would by law trigger Article 63. Former president Chen Shui-bian (陳水扁), no fan of the CCP and currently a political prisoner of the KMT, was the man who reaffirmed the bonds via Article 63. Indeed, Chen no doubt knew that by keeping the debt issue simmering on the back burner, reconciliation would be less likely given the potential amounts at stake.

Taiwan itself, under Republic of China occupation since 1945, had no part to play in racking up the debt. Taiwan was a possession of Japan from 1895 until 1945, the very dates when almost all of the debt arose. Taiwanese would not stand for insult being added to injury by being forced to pay off a hefty portion of the KMT’s debt in China, which financed the industrial infrastructure that the PRC today exploits. Yet, the KMT that stands to profit from a reconciliation seems to believe that Taiwanese will meekly pay any cost.

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