Vulture funds to be curbed
Legislation is going through Parliament and the US legislative procedure at the present time whose purport will be to curb the activities of the so-called ‘vulture funds’, which buy up the debts of countries who cannot afford to pay them – at a fraction of the amount owed – and then proceed to bring action against those countries to enforce payment of as much as possible.
Having got court judgments in their favour, the funds in question can then obtain orders against those who owe the debtor countries money, or who hold assets that belong to the debtor country, including goods they have just bought, that they should pay the vultures instead or hand over to them the assets or goods in question.
The rights the vultures have against the debtor country in question are no different from the rights that the original creditor would have had. However, proceedings against sovereign states are legally complicated. The vultures have lawyers and, presumably, inquiry agents who specialise in these matters, with the result that they are more effective in collecting the cash than the original creditor might have been.
The plight of the impoverished debtor countries – countries such as Zambia, Niger, Mali, Peru, etc – is not unlike the plight of poor peasants all over the world who are indebted to loan sharks and usurers. Operating in a market economy, poor peasants run up debts in years when the crop fails or there is a glut that makes prices for their products low. With interest payments constantly accumulating, many find it impossible, however hard they work, ever to pay off the debt.
With their resources stretched by the need to make debt payments, these small-scale farmers are unable to improve their land, purchase machinery, or invest for the future in any way. They fall further and further behind. Eventually, they are forced off the land to live as paupers in the city, or they commit suicide or die before their time of malnutrition-related diseases.
In these cases, the moneylender cannot recover from these victims of the system all of what is owed to him, but he is reaping more than enough from his other debtors to allow for inevitable losses.
Within advanced imperialist countries, there are provisions for debt relief in cases where people or businesses become hopelessly insolvent. Bankruptcy and insolvency procedures have the effect of wiping out the debt, creditors sharing out among themselves whatever little is left after deducting the most basic needs of the bankrupt and his family.
At least, however, the bankrupt is able to start up again with a clean slate. In England, insolvent companies can sell all their business to another company, sometimes a new company set up by the same directors, and the creditors of the debtor company have to make do with sharing among themselves the proceeds of that sale.
While creditors do lose out as a result of this process (especially small businesses, which often become insolvent themselves if a major customer defaults), the relief of debtors in this way does reduce the build-up of popular discontent and bring a level of stability to capitalist society. It also makes lenders more careful to whom they lend and on what terms. However, there is no formal and comprehensive system of debt relief operating internationally.
Nevertheless, clever imperialist financiers, unlike the loan sharks who lend to peasants and use their default as an excuse to grab their land, do tend to be amenable to rescheduling debt, or even cancelling a proportion of it, so that their extraction of superprofits can continue – albeit at a reduced rate.
Rescheduling of sovereign debt is fairly routine. In the case of Highly Indebted Poor Countries (HIPCs), under the aegis of the IMF and World Bank, creditors have since 1996 been encouraged to cancel a proportion of the debt that is technically owed to them – amounting sometimes to almost the whole debt – with a view to equitable sharing of the loss among themselves.
The principle is that if a country is simply left to starve, revolution on the part of its population is inevitable, leaving the imperialists with nothing and threatening their world hegemony. On the other hand, if poor countries are sufficiently relieved of their debt to be able to continue economic activity at a reasonable level, and maintain their population in a state of relative passivity, the imperialist parasites will benefit in the long run. A parasite that kills its host of necessity fails to thrive!
The HIPC scheme, however, is not comprehensive. It does not cover all debtor countries, even many which are in serious difficulties, or all creditor countries. It does not cover all creditors. This is where the vulture funds come in and, much to the fury of creditors who have agreed to accept losses, by aggressive pursuit of debt enforcement scoop up a far higher dividend than creditors generally can expect.
In addition, they jeopardise plans to keep the affected countries going. This is the context in which imperialist countries such as the US and the UK are expected to pass legislation curbing vulture activity.
Some notorious examples of vulture activity include the following:
“In 1979 Zambia was lent $15m by Romania to purchase tractors. Twenty years on, Zambia was one of many countries caught in a ‘debt trap’ – unable to repay the rapidly expanding interest on its debt, never mind the underlying stock. It became eligible for debt relief. At the last moment Donegal International purchased Romania’s debt for $3.3m and ultimately sued for $55m. The UK judge highlighted the dishonesty used by the company in their dealings with Zambia, but ruled that they had a case in law and granted them $15.5m. Zambia effectively handed over money which had been provided by other creditors foregoing payment. Presidential Advisor Kalunga-Banda pointed out that paying Donegal meant ‘the treatment, the Medicare, the medicines that would have been available to in excess of 100,000 people in the country will not be available’.” (‘The business case for prohibiting “vulture” actions in UK courts’ by Nick Dearden for the Jubilee Debt Campaign)
“A particularly notorious case was Elliot Associates vs Peru. Elliot Associates, a US firm, successfully sued the Peruvian government for $58m on a debt they had procured for $11m and then took out a legal injunction preventing Peru from paying its other creditors until they had been paid in full.” (SCIAF, reproducing an article originally published in The Tablet, the Roman catholic magazine).
In fact, it was Paul Singer of Elliott Associates who was responsible for first popularising vulture activity.
The Democratic Republic of Congo is being forced to pay $20,000 a week to FG Hemisphere, a New York-based vulture fund which has acquired a debt incurred with Tito’s Yugoslavia in the 1980s. These penalties will, on the judgment of a court in Washington, rise to $80,000 a week unless the DRC complies with a demand to provide detailed information about all its assets all over the world – so that the creditor in question can sequester them! With interest and penalties, the original debt has now skyrocketed to $100m.
Nick Dearden, director of the Jubilee Debt Campaign commented: “The World Bank has made clear that DRC cannot afford to pay its debts. Today as DRC struggles to emerge from a past characterised by slavery, imperialism, looting and war, they are attacked again by financial vultures.”
Furthermore, he concluded, “At least 54 companies are known to have taken over $1.8bn.”
Currently “Vulture action is ongoing against Ethiopia, Cameroon, Argentina, the Democratic Republic of the Congo and others, according to World Bank reports.” (‘US bill would outlaw vulture funds’ by Ashley Seager, The Guardian, 20 June 2009)
This is the context, then, in which legislation is being proposed in Britain and the US to deal with the vulture funds.
“1. The British government is proposing legislation which would insist on UK courts applying internationally-agreed debt relief (HIPC) terms to vulture cases. In other words, if a vulture fund brought a case [against an officially recognised HIPC] to a British court a large discount (between 60-90 percent) would be applied to the claim to bring it into line with the reduction already accepted by other creditors. In short it would make vulture activity against debt-eligible countries unprofitable, though it would not prevent standing creditors from receiving internationally-agreed levels of recompense.
“2. A Private Members Bill [the Developing Country Debt (Restriction of Recovery) Bill] was introduced to the House of Commons in May, and aims to prevent profiteering on the sovereign debt of all developing countries. It would essentially apply a cap to the level of profit that vultures could claim against developing country debt in UK courts so that the award could be no more than the amount the debt was bought for, plus a reasonable rate of interest.” (Nick Dearden, op cit)
In the US, Democrat Maxine Waters has introduced the Stop Vulture Funds Act, HR 2932, which is expected to become law.
“The Stop VULTURE Funds Act, HR 2932, will prevent Vulture Funds from utilising US courts to profiteer off of resources freed up from debt cancellation. The Act:
“Prohibits using a US court for the purpose of sovereign debt profiteering, defined as pursuing the payment of a defaulted debt in an amount that exceeds the total amount paid for the debt by the creditor.
“Caps the judgment Vulture Funds can receive to 6 percent annual return over the amount the debt was purchased.
“Requires greater transparency from Vulture Funds, who operate in secrecy and are often based in tax havens like the Cayman Islands. Under HR 2932, creditors will disclose who owns the debt, how much it was bought for, whether fraud took place in acquiring the debt, and any upcoming legal claims against poor country debtors.”
While no doubt this legislation, if passed, will provide some relief to indebted countries, the imperialist system of extracting values from the third world and of transferring them from poor countries to rich ones, will not only continue, but be strengthened. For countries to benefit from IMF and World Bank programmes, they are forced to open their public sector to privateers, who milk public services for profit, and their economies become more subject than ever to imperialist diktat.
Jubilee USA Briefing Note 2 notes that “12 years since the inception of the Heavily Indebted Poor Countries Initiative (HIPC) in 1996, the main debt relief programme at the World Bank and IMF, the initiative suffers from serious flaws. Among them are the harmful economic policy requirements attached to both debt relief and lending from the IMF and World Bank. These harmful policy requirements (not to be confused with provisions to ensure transparency and accountability in the use of loans and debt relief monies) are undermining and sometimes even negating the benefits of debt cancellation. Some of the most egregious policies force countries applying for debt relief to adhere to strict IMF fiscal and monetary targets, privatise key industries, liberalise their markets, and remove subsidies for sensitive commodities like gasoline and cooking oil. These requirements often hurt the poorest and most vulnerable people and should be stopped immediately to enable debt relief to meet its life saving promise.” (‘Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?’)
They should know that imperialist charity always has an ulterior motive. It is always charity for the benefit of imperialism, not charity for the benefit of the recipient!