10. Vulture Funds Threaten Poor Nations’ Debt Relief

Source:

BBC Newsnight, February 14, 2007
Title: “Vulture Fund Threat to Third World”
Author: Greg Palast with Meirion Jones
http://www.informationclearinghouse.info/article17070.htm

Student Researcher: Jenifer German
Faculty Evaluator: Robert Girling, Ph.D.

Vulture funds, otherwise known as “distressed-debt investors,” are undermining UN and other global efforts to relieve impoverished Third World nations of the debt that has burdened them for many decades.

Vulture funds are financial organizations that buy up debts that are near default or bankruptcy. The vulture fund will pay the original investor pennies on the dollar for the debt and then approach the debtor to arrange a better repayment on the loan, or will go after the debtor in court.
In the private financial world, these funds, like the birds they are named for, provide a useful function for investors who are unable to follow up on defaulted debts and are themselves facing financial ruin if the debtor reneges entirely.

Under normal circumstances, distressed-debt investing—like day trading—is risky business. It is a gamble and the company knows that going in. The vulture fund may get nothing for its investment if the debtor continues to default and has no assets to attach. However, if there is still meat on the bones (the debtor has considerable assets to liquidate) the vulture fund can make millions.

A problem has arisen in recent years, however, as vulture funds have begun inserting themselves into an increasingly globalized “free market”—where no distinction is made between an irresponsible and defaulted company and a destitute and impoverished nation.
In the case of nations, the actions of vulture funds are corrupting the process begun in 1996 to provide debt relief for Third World nations struggling to emerge from the heavy debt laid upon them by previous corrupt rulers and colonial masters.

In one recent case, the poverty-stricken nation of Zambia was negotiating with Romania to reduce a $40 million debt still owed from a 1979 loan to buy Romanian tractors. In 1999, Romania had agreed to liquidate the entire loan for $3 million. Zambia planned to use the debt cancellation to invest in much-needed nurses, teachers, and basic infrastructure. Just before the deal was finalized however, investors at the England-based vulture fund Donegal International convinced the Romanian government to sell them the loan for just under $4 million—not much more than Zambia had offered. Donegal then turned around and sued Zambia (where the average wage is barely a dollar a day) for the full $40 million.

Throughout the lawsuit, global NGOs have pleaded with the English High Court to void the new contract and allow Zambia to honor the original agreement of $3 million. But on February 15, 2007, an English court ruled that Donegal was entitled to much of what it was seeking—at least $15 million, perhaps more.1

In a last desperate plea, global NGOs working to relieve Third World debt (such as Oxfam and the Jubilee Debt Campaign) turned to Donegal directly, asking them to forgive the debt. Donegal knows that, as a national entity, even a cash-poor country like Zambia has access to considerable resources; in this case copper, cobalt, gem stones, coal, uranium, marble, and much more. Public works and other civic improvement projects can also be liquidated.

Also, Donegal has no history of mercy toward impoverished nations. In 1996 it paid $11 million for a discounted Peruvian debt and threatened to bankrupt the country unless they paid $58 million. Donegal got its money. Now they’re suing Congo Brazzaville for $400 million for a debt they bought for $10 million. Donegal and other vulture funds have teams of lawyers combing the world for assets that can be seized.

Even worse, many of these vulture funds have influential ties to powerful world leaders like the Bush administration. The risk normally faced by distressed-debt investors is virtually eliminated when they have political influence that is greater than the poor nation they are suing. They raise most of their money through legal actions in US courts, where lobbying and political contributions hold influence. And many vulture fund CEOs have close links to top officials both in the US and England.

President Bush has the power to block collection of debts by vulture funds, either individual ones or all of them, if he considers it to be at odds with US foreign policy—in this case debt relief for poor countries.2 According to Congressman John Conyers, “It’s our position that the Foreign Corrupt Practices Act and the comity doctrine brought from our constitution allows the president to require the courts defer in individual suits against foreign nations. And so, we’re conducting a couple of things. First of all, we want to know where these practices are going on at the present time, and, two, how we can get this information to President Bush so that he can, as he indicated to us, stop it immediately.”3

Chancellor Gordon Brown, now the prime minister of England, calls the vulture funds perverse and immoral. Oxfam and Jubilee have urged the chancellor to use his influence as chair of the International Monetary Fund’s key decision-making committee to make sure that new regulations are devised that prevent private companies from bypassing international debt rules and pursuing debts from very poor countries.

Citations

1. Ashley Seager, “Court Lets Vulture Fund Claw Back Zambian Millions,” The Guardian, February 16, 2007.
2. Ashley Seager, “Bush Could Block Debt Collection by ‘Vulture’ Funds,” Guardian Unlimited, February 22, 2007.
3. “Conyers Confronts Bush On Vulture Bonds,” an interview with Democracy Now!, February 16, 2007.