• 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.