• Pennies on the dollar vulture funds are the bottom feeders of global finance
Since the mid-90s, the so-called vulture funds have been suing poor countries so that they would fully pay back their debts which they had purchased for pennies on the dollar.
The purpose of the bill was to limit the amount that can be recovered by any commercial creditor from defaulting on countries designated as possessing unsustainable external debts. If passed, it would have limited successful claims to an internationally agreed level and would apply equally to all commercial creditors. The bill would cover the 40 countries qualifying for the IMF/World Bank Heavily Indebted Poor Countries (HIPC) initiative. The only chance of passing the bill before the British general elections this June was if there was unanimity in the House of Commons. Chope has single-handedly prevented the Debt Relief Bill applying to developing countries from passing in its third reading by shouting the word “object!”
As Chope later explained, he rejected the pending bill, which was a bipartisan endeavour involving the two respective parties, because he felt that it had not been properly debated by the commons. In an interview with the London daily The Guardian, Labour Member of Parliament, Sally Keeble, vented her anger on the issue and said, “It’s blatantly obvious that this was duplicitous behaviour by the Conservatives whose commitment to international development is deeply suspect.” Although the Tory leadership has tried to distance itself from the event, it is hard to believe that this was done without their tacit support. Now, everything will remain paralyzed in place: poor countries that the bill had hoped to protect will remain at the mercy of the merciless vulture funds and their legislative servitors like Chope. This incident is only one of a number of examples of the inability of global policy makers to deal with the intensely self-absorbed and marginal financial institutions that continue to make the world’s poorest countries even more destitute, and further pervert the developmental policies of rich countries and the Bretton Woods institutions.
Rendering the Poor, Poorer
The term “vulture funds” is how critics have labelled the more smarmy and marginal investment houses which buy up the defaulted debt of poor countries for pennies on the dollar, and then proceed to sue them for immediate repayment on their full face value, plus interest. As an example of how this is done: A developing country sells bonds on which it eventually defaults. The vulture fund purchases the debt from the lender at bargain basement prices and proceeds to sue the issuing country, or uses other tactics to summarily claim to be paid the bonds’ full worth as compensation. When litigated, more than half of the resulting court cases were won by the vulture funds, ensuring in many instances outrageous profits in excess of 400 percent.
One of the “brilliant” masterminds behind this strategy is the Republican businessman Paul Singer, reputably the biggest funder of the Republican Party in New York. In 1996, Singer’s firm, Elliot Associates Ltd., sued Peru for $58 million, after the firm had bought $11 million (one-tenth of what it was worth before the country had defaulted) worth of debt. The U.S. Federal Court of Appeals ruled in Singer’s favour, who then threatened Peruvian officials to drive the country into bankruptcy and block Peru’s negotiations with the Bretton Woods-institutions unless that country’s treasury repaid its obligation to him. Finally, on October 7, 1996, the impoverished Latin American country had to pay $58 million to Singer, who made a $ 47 million dollar profit on the debt.
At present, at least 20 African and Latin American countries are becoming increasingly exposed to the Vulture Funds: most of these countries are among the “highly indebted poor countries” (HIPC). A notorious example of this pillaging involves the African country of Zambia, which was sued by Michael Francis Sheehan’s company, Donegal International. Sheehan bought $15 million worth of debt for a mere $3 million and sued Zambia in a British court for the full amount, which by then had accumulated to $55 million. In February 2007, Sheehan filed and later won the process against that poverty-stricken country, which was and remains severely affected by chronic humanitarian problems. Zambia had to pay $15 million to Sheehan’s British Virgin Isles-registered company.
Vulture Funds Crack Down
It doesn’t happen very often that vulture organizations openly disclose information regarding suits against their poverty-stricken countries. These organizations attempt to remain concealed from public exposure, as was most evident when vulture funder Eric Hermann physically hid himself when a BBC reporter wanted to interview him. However on occasion and under intense scrutiny, representatives from vulture organizations are tempted to justify their actions.
Vulture funds defend themselves by asserting that they are providing a service to developed countries. The beneficiaries of the lawsuits talk about corruption in developing countries, whose assets have been stolen by rulers. By suing the poor countries the funds hope to gain access to these hidden assets, explained Sheehan’s employee, Daniel Zayala, before the UN-Council Unctad in November 2007, as reported in a German business newspaper Handelsblatt. If the western countries had been able to put more pressure on these corrupt rulers such assets would not exist, according to Zayala. In other words, the vultures pressure corrupt leaders to repay the loans, dirty work the rich countries do not want to be seen carrying out. However, the problem is that not only will corrupt dictators be negatively affected by the claims of the vultures, but new successor governments which often have nothing to do with the previous rulers, are likely to be hurt by these transactions.
In Zambia, the debt was sold by the country’s strongman, Kenneth Kaunda, to the dictator of Romania, Nicolae Ceauşescu, in 1979. Sheehan in turn, purchased the debt from Ceauşescu, almost 30 years later. Sheehan then sued Zambia; by that point, the African country was under the leadership of democratically elected-president Levy Mwanawasa. The Mwanawasa government asserted – and aid groups verified its claims – that a payment on the debt would seriously worsen the humanitarian situation in Zambia and that many of its citizens who were not even born in 1979 would subsequently suffer.
The Debt Relief Bill sought to protect poorer HICP-countries (in Latin America: Bolivia, Guyana, Haiti, Honduras and Nicaragua). But policy makers missed setting outer bounds to the actions of the vulture funds.
Futile Development Policy
In order to ensure that indebted countries repay their obligations, the World Bank will frequently provide funds to these debtor countries. This flood of funding further encourages vulture fund organizations to buy the discounted debt and then sue developing countries. As a result, rich countries have to pay twice. Firstly, the wealthy states lend money to the poor countries which they do not collect if a country defaults. Secondly, they also help capitalize the World Bank so that the institution can lend money to these defaulted poor country. However, if the poor country uses the second loan to satisfy its debts to the vulture funds, it can not use the money for development projects and will consequently need to contract new loans. This turns out to be a bizarre development policy.
The Paris Club, an informal body of financial officials representing 19 of some of the world’s largest economies, which provides financial services such as debt restructuring, voiced its intention in 2007 not to sell their claims against HIPC countries to creditors who do not intend to provide debt relief under the HIPC initiative. However, the lack of mandatory legal grounds for not trying to harness the vulture funds can consequently contribute to the crumbling of the solidarity among the Paris Club countries. The vultures presently are taking advantage of the current stalemated situation to which policy makers were not prepared to harmonize.
Some policy makers are even worsening the situation by backing the vultures: The controversial, former New York Congressman Eric Massa, backed a bill called “The Judgment Evading Foreign States Accountability Act,” which stated that if, indebted countries do not pay their debts, the United States would cut off trade with these countries. Massa was aided by the vulture Singer, who showed him his appreciation by supporting it (COHA was among the first to report about Massa’s connections). This bill, which had little chance of passing, would be extremely deleterious to the relationship between the indebted countries and the United States. If enacted into law, the proposed legislation might create the false impression that the Congress is willing to benefit the vultures. This could deteriorate the U.S. relationship to Argentina among other being encircled by the vultures.
Jubilee USA, an alliance of more than 80 NGOs, has elaborated several potential policy responses to the vulture funds. Above all is the proposition that all countries should pledge not to sell their debt instruments to vulture funds. If no claims were sold to the vultures, they could not sue the developing countries. However, as it currently stands among policy makers, there only appears to be talk about reining in the infamous vultures: concrete action is yet to be seen.
The COHA analysis suggests that debts be repaid or forgiven, apparently in the sole discretion of the borrower.
Two objections come immediately to mind:
1. Who would pay a debt that is seen as borrower-discretionary? Developing nations, with the choral assistance of organizations like COHA, can always find a high-minded use for the money owed to (i.e., belonging to) someone else. Companies like Donegal are well paid, indeed; but they serve as a reality test for national leaders who would like to flee from the cost of their own or their predecessors' policies.
2. The less likely that debt collection becomes, the higher the interest rate that will be charged when the next prospective borrower makes application for a loan. Why should a more prudently governed country pay higher interest due to the failed dreams of its neighbors?
The problem is that the very logic proposed by McElhone support the affirmative steps on limiting the vultures. McElhone's question of "[w]hy should a more prudently governed country pay higher interest due to the failed dreams of its neighbors?" begs the question of why a new generation should pay the debt of a previous dictator that borrowed money with no intention to repay it. The problem here is the borrower and the best example is the Zambia case. Was it really a viable (business like) loan by Romania or simply a covered payment to Kaunda with the intention of passing the tab to the next generation?
Totally agree with McElhone. Vultures [let us not use that name anymore] do the job lending government are cowardly leaving on the table. At a profit. That profit can be made because the lenders has given up. Court decisions prove that they should have sued their debtors;.in stead they waste taxpayers money.
This article is COHA at its best. The rhetoric is high-minded and the logic is sophomoric. If all deadbeat borrowers are saints and all lenders are evil, why don't we try to convince those Chinese vultures to forgive all the Obama debt that can never be repaid?
And, while we are at it, why should the moral right renege on debts belong only to governments? Why should I pay my student loans, or my grocer? Why should employers pay their debts at the end of the week?
How many COHA interns could spend their year on their airy fatuities if their parents could not collect what is owed to them?
Hey, Birns, could you lend me a few bucks? I promise to repay you, unless a finer use for the money supersedes.
Vulture Funds – Coming Soon to a Bankrupt Municipality Near You!
The entire rhetoric of vultures unjustly oppressing the poorer nations and needy segments of the world population is quite lovely and noble. Likewise is the underlying criticism of the excesses of the global capitalistic system, as it currently exists in the Western World, with its implicit abuses, inequities and historically certified imperialistic proclivities… All of which this Organization repeatedly (and to a certain extent understandably) has been consistently exposing, criticizing and assailing with implacable vigor while exercising its noble, just, unquestionable and paramount right of FREEDOM OF SPEECH and independent thought.
Interestingly, the very same organization which so valiantly exposes the "nasty, shameless & imperialist vultures” in Washington, London, Paris and Berlin, somehow appears to enthusiastically praise political leaders and /or regimes such as Hugo Chavez & Evo Morales’ so called “Bolivarian Movement”, the "Castro Marxist Polity”, as well as every single totalitarian administration which currently CURTAILS the very same FREEDOM OF SPEECH, which the “noble” COHA so enthusiastically – and I daresay HYPOCRITICALLY – utilizes to criticize its “evil opponents” (who grant them this very right)…
Bearing in mind that the dominant species of this Planet consists of Human Beings, a race filled with inumerable flaws which range from "the selfish pursuit of individual interests” (even when alleging to be acting “for the good of the people”, the “capacity of spread lies”, the proclivity to be “unjust (by manipulating laws and statistical data”, to fabricate evidence (in order to be used in political propaganda), and to provide misinformation (a.k.a. DIS-information), along with Humanity’s immense potential for cruelty, oppression, torture, harassment, and merciless mass murder… I fail to see the obvious benefits of the political philosophy which due to massive censorship, ideological imposition, and central controls, is capable to efficiently conceal any such flaw and/or monstrous deed, thereby appearing as a pristine, heavenly system of Brave defenders of Socialism, which is espoused by COHA as an alternative for the existing environment controlled by the Selfish vultures…
Before anyone may consider accusing me of being an “agent of the capitalist apparatus” or one of their blind supporters, I would like to contend – in advance – that not only I am not independently wealthy, but I also happen to have recently become a victim of the very greedy corporate America – one of the main sources of many of the Vultures being criticized here – the moment when my employment was eliminated & sacrificed for the "greater goal” of an UNJUST ability to maintain the high profitability which will justify, in the long run, the vultures’ ability to secure for themselves very high bonuses.
Nevertheless, in spite of my grave situation, I would rather keep the very vulture, who have robbed the very means of my livelihood, in charge instead of embracing cynical, hypocritical and implacably Totalitarian Socialist leaders who impose censorship and redouble internal controls (often making use of illegal militias) to impose an intolerable, inefficient, unfair economic-political system where they have absolute power (in light of the absence of any pluralistic political environment, without any checks and balances) to establish a brand new, highly corrupted “ideologically correct elites”. Indeed, wherever the existing authorities are able to control the flow of information, confiscate private property, they are poised to manipulate any statistical data, to portray colorful news, and thus emerge as the type of Great Socialist moment on behalf of which COHA just loves to indulge with grandiose articles praising their leaders as great Defenders of the People…
Quite frankly, I am perplexed and overwhelmed by COHA’s extreme naiveté and/or exceeding Hypocrisy… How can one possibly defend a political system which permits the WORSE of human condition to run amok, thereby inevitably turning a country into a prison – like North Korea or Maoist China? How can COHA have the decency to defend such system and their leaders with a blank face (while criticizing others – like the vultures – for much less)?
I think what needs to be pointed out is the nature of the debts accrued by borrowing governments. Where debts have been accrued by US-backed dictators who forcefully pushed out their democratic predecessors and used torture and massacres against the population that did not like them or their policies, should the costs of those failed policies be paid for by that population? And further should it be used as an incentive to ensure that policies that could only be imposed by the tyranny of dictators now be imposed through the tyranny of debt?
Living in a country and a state whose debt to GDP ratios are worse than that of Europe, which is often characterized in the US press as a spendthrift, I know what it is to bear the burden of government debt to which I was opposed from the outset. And I grant that the obligation would be all the more galling if the debt had been run up via torture rather than mere lies and ineptitude.
National debt, however, like personal debt, carries a price that is affected by the collection experience of the lender. If the lender's experience is degraded by ex post facto bars to collection, that experience will be reflected in the borrowing costs of "innocent" governments pursuing appropriate projects such as road building.
Second, most borrowers do not fall at the ends of the good-governance spectrum; they are neither Switzerland nor Zimbabwe. However they would all be tempted to default if it were made easy. Think, for example of Argentina where debt-renunciation has become a standing policy option. The more we facilitate debt-evasion by over-promised, under-achieving governments, the more we pay for legitimate borrowing and the more we encourage a cavalier governmental attitude toward borrowing.
That is true using correct and perfectly logical business logic. The problem is that it misreads the initiative. The initiative was not to limit collection procedures on the debts of any and all countries but rather to limit (to an international agreeable level) collection on the debt of 40 countries that the international community has reviewed and concluded (based on many factors) that the complete collection of the debt is unsustainable. That is the internationalization of our bankruptcy code.
40 countries? Almost a quarter of the nations on earth?
I appreciate the problem, I think, and I sympathize with citizens the world over who are forced to pick up the tab for their politicians' or caudillos' excesses. However, terms like "an international agreeable level" are so patently subject to public relations and political manipulation that I cannot take them seriously as financial administration tools.
If there are 40 countries that are unfit to manage their accounts, then prohibit them from borrowing. Institute the solution prospectively, not after the funds have been borrowed and spent.
As to the impecunious 40, let those countries that favor debt forgiveness accept the responibility for those debtor nations' economic administration; that is to say, put them in a sort of tender-hearted receivership.
The proposal as it stands, even subject to your clarification, is essentially an intolerable scheme. It takes the wealth of one unwilling entity that thought it was party to a business transaction, and gives it to a borrower that for "many factors" refuses to meet its obligations. Surely, that cannot be the road to international fiscal probity?