Posted on: Friday, June 25, 2004

Nauru woes could hurt regional stability

By William Mellor
Bloomberg News Service

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.

In January, Nauru's government defaulted on the loan. And in April, General Electric asked receivers to sell Nauru's Australian shopping center, office building and hotels.

They are worth an estimated $200 million — the top 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.

A Nauru trust based on O'ahu last year sold the land and development rights for two residential high-rises in Kaka'ako that are adjacent to the existing Nauru and Hawaiki towers.

The central bank is broke, according to the Manila-based Asian Development Bank.

"They've blown close to $2 billion," said Helen Hughes, 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 that passports are still being sold by "high government" officials for as much as $50,000.

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.