Clouds over paradise as island of Nauru sinks into bankruptcy

Australia is a second home to Rene Harris, President of the tiny Pacific island of Nauru. In the past, he often travelled there for medical treatment or to feast his eyes on his country's portfolio of grand properties in Melbourne.

Australia is a second home to Rene Harris, President of the tiny Pacific island of Nauru. In the past, he often travelled there for medical treatment or to feast his eyes on his country's portfolio of grand properties in Melbourne.

This week, his visit has a more urgent purpose: to seek funds to keep his country afloat.

Nauru is on the verge of bankruptcy, and today Mr Harris will go cap in hand to Alexander Downer, the Australian Foreign Minister, and outline its desperate financial plight. The country is about to default on a loan to an American financier, and receivers took over its Australian assets, including a shopping centre and hotels in Sydney and Melbourne, last week.

Mr Downer hinted last weekend that Australia, which has propped up the island in recent years, may not be prepared to bail it out once again.

"It's not a question of [giving] more or less money, I suspect, but a question of making sure that there's a better understanding of what their net asset situation is and how best to manage their assets," he said.

Management - or rather, mismanagement - helps explain the downward spiral of Nauru, once one of the world's wealthiest countries but now a basketcase in a region of struggling Pacific island states.

Nauru, home to 10,500 people, grew wealthy on the back of phosphate mining and in the early 1970s boasted the world's second-highest per capita income, after the oil-rich United Arab Emirates. But royalties were wasted on extravagant projects, hare-brained schemes and failed investments, while the mined interior of the eight square-mile island became a barren wasteland. Only the coastal fringe is now habitable.

The island state has lurched from one financial crisis to the next in recent years, and has only survived because of millions of dollars of aid given to reward it for housing Australia's unwanted asylum-seekers. During one emergency in 1991, the Finance Minister, Aloysius Amwano, flew to Australia and returned with $1m Australian dollars (£414,000) of cash.

But the hand-outs have not solved the country's fundamental problems, which include shortages of water and fresh vegetables as well as chronic power failures. Last year, its telephone system collapsed and Nauru - situated half way between New Zealand and Hawaii - was cut off from the outside world for weeks. Its single-plane airline has been intermittently grounded for safety reasons or lack of fuel.

Now it seems that its day of reckoning is approaching, with properties such the four-star Mercure Hotel near Sydney's Central Railway station taken over by receivers for General Electric Capital Corporation.

The assets - the remnants of a property portfolio once worth A$1bn - had been offered as security on an A$200m loan by the US financier.

To make matters worse, the nation is in the grip of another of the political power struggles that have repeatedly paralysed it in recent years. Parliament has not had a Speaker since last May, which means no bills can be passed, and the legislature - in which the government and opposition control nine seats apiece - is deadlocked. Mr Harris failed to get the budget passed last week.

Australia may yet ride to the rescue again, for it owes a huge debt to Nauru for enabling it to save face when it refused to allow Afghan aslyum-seekers aboard a Norwegian freighter, the Tampa, to land in September 2001, which outraged the international community.

Nearly 300 people are still incarcerated in the country's two detention camps, out of sight of prying eyes because the government - at Australia's bidding - has banned all unauthorised visits. But letters and e-mails from detainees tell of poor food, lack of fresh water, disease and distress. Mental illness is said to be widespread.

Australia, which has promised Nauru an extra A$22.5m in aid this year in exchange for maintaining the camps until June 2005, is also concerned that failing nations on its doorstep could turn into havens for drug smugglers and terrorists. Last year, Mr Downer floated the idea of offering citizenship to all Nauruans, or even giving them a vacant island of their own off the Australian mainland.

From a historical perspective, Australia shares some responsibility for the situation in which Nauru finds itself, as do Britain and New Zealand. First discovered in 1898 by the captain of an English whaler, who called it Pleasant Island, Nauru's population was decimated by alcohol and diseases introduced by white settlers.

It became a German possession, but was seized by Australia during the First World War after it was found to have the world's richest phosphate deposits. So excited was Australia's then prime minister, Billy Hughes, by this discovery that he proposed annexing Nauru at the end of the war.

Instead, it was mandated by the League of Nations to Britain, Australia and New Zealand, which formed the British Phosphate Commission and set about stripping it of phosphate. The material was shipped to Australia and New Zealand, where it was sold at nominal prices and became the main agricultural fertiliser.

During the Second World War, the Japanese occupied Nauru and took 1,200 of its 2,000 inhabitants into slavery. The 793 survivors returned in 1946. When the country gained independence in 1968, two-thirds of its surface had already been mined and the interior resembled a bleak moonscape.

An independent commission of inquiry subsequently found that Australia, Britain and new Zealand had violated international law by failing to restore it to "usable condition". Australia resisted demands to fund rehabilitation work, so Nauru went to the International Court of Justice and won. In 1993 Australia finally came up with some compensation.

Sadly, Nauru itself proved staggeringly incompetent - and corrupt - when it came to managing its own affairs. The Nauru Phosphate Royalties Trust bought showpiece properties around the world which ended up mortgaged to the hilt. Among the disastrous schemes into which money was ploughed was a West End musical about Leonardo da Vinci that had blistering reviews and closed within a month.

Under the founding president, Hammer DeRoburt, travellers risked being stranded for days on the island, because he and wife would commandeer Air Nauru's sole plane for shopping excursions to Hong Kong.

In the 1990s Nauru became a major money-laundering centre for Russian criminal organisations and at one point had 400 offshore banks, all registered to one government mailbox. Last year it bowed to international pressure and closed them down.

Wealth brought diseases of affluence, as Nauru flew in processed Western foods to replace its traditional fish-based diet. The country now has the world's highest rate of diabetes, as well as alarming levels of obesity. It has the Pacific's highest accident rate, although there is just one 12-mile road around the island's perimeter.

A decade ago, Kinza Clodumar, the then finance minister, said: "Nauru was once a tropical paradise, a rainforest hung with fruits and flower, vines and orchids. Now, thanks to human avarice ... and short-sightedness, our island is mostly a wasteland."