What happens to a tax haven when it has to raise taxes? The Cayman Islands may soon find out. Caught in a vise of shrinking revenue and stubbornly high public spending, the Caymans averted a fiscal crisis this week by securing a $60 million overseas loan.

But the Foreign and Commonwealth office in Britain, which oversees the Caymans and can veto foreign lending requests, has delivered an ultimatum: The rest of the $284 million the Cayman government says it needs will not be forthcoming until this offshore financial center imposes spending cuts and considers some form of direct taxation on businesses here and its 57,000 residents.

The Caymans have built their prosperity less on tourism, like most other Caribbean islands, and more on serving as a tax-free home for 9,253 hedge funds and many more banks and companies that pay small fees to establish the Caymans as their official domicile while operating mostly elsewhere around the world.

Leader of the Cayman government, W McKeeva Bush, is desperately trying to find a way out of his quandary, caught between the demands of local business leaders to keep things the way they are and insistence from London that the economic model of the Cayman Islands must change.

“The UK has to be practical,” he said, warning that too bold a new tax program could prompt Cayman-based financial firms to leave. “They don’t want me to go belly up.” Perhaps not, but there is no getting around the fact that the balmy days for exotic offshore financial centers like the Caymans could be coming to an end.

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