Vulture Funds and Poor Country Debt: Issues for Investors

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• Vulture Funds and Poor Country Debt Issues for
  Investors
• Presentation by Tamara Gaw, TransAfrica Forum
• to the International Working Group, Social
  Investment Forum,
• March 19, 2009

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Vulture Funds and the Threat to Debt Relief

• Since the Jubilee 2000 campaign brought the
  issues of crushing poor country debt in the late
  1990s, world leaders and international
  institutions have provided more than 80 billion
  in debt relief to more than 30 poor nations in
  Africa and Latin America
• But in recent years so-called Vulture Funds
  specializing in acquisition of and then
  litigation of poor country debts have entered the
  scene, threatening to reduce the gains won by
  campaigners and advocates
• Lawsuits by commercial creditors to collect on
  outstanding HIPC country debt can erode gains
  made through debt relief. - US Government
  Accountability Office (GAO) report, January 2009)

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What is a vulture fund?

• There are many types of Vulture Funds. But in
  this context, when we say Vulture Fund, we mean
  a company that buys low-income country sovereign
  debt on the secondary market for pennies on the
  dollar and then sues or otherwise pursues the
  impoverished country for damages well beyond the
  amount the debt was acquired for.
• Vulture Funds are often housed within hedge funds
  and may have operations obscured in offshore tax
  havens or secrecy jurisdictions.

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What are the impacts of vulture funds on the
poorest?

• More than 20 Heavily Indebted Poor Countries
  (HIPCs) have been subject to lawsuits by
  commercial, non Paris Club, or Vulture creditors.
  The poor country almost always loses.
• When a country loses a case, it means severe
  social impacts
• In Niger, lawsuit costs in one year represented
  52.2 of health/education spending
• For Cameroon, the costs to address lawsuits was
  equal to 98 of government revenue in one year

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Case Study Zambia

• The Vulture Fund Donegal International acquired
  debt Zambia owed Romania on the secondary market
  for 3 million.
• Seven years later, just after it received debt
  cancellation, Donegal sued Zambia for 55
  million.
• In 2007, the British High Court ruled that Zambia
  must pay Donegal 15 million, 65 of what Donegal
  saved in debt relief that year.

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What countries are currently facing threats from
vulture funds and/or lawsuits?

• According the GAO, there are currently 47
  litigating creditors making claims of 1.32
  billion on 11 poor countries that are receiving
  or have received debt relief under the IMF/World
  Bank debt relief initiative.
• The countries are Cameroon, DRC, Ethiopia,
  Guyana, Honduras, Liberia, Nicaragua, Republic of
  Congo, Sierra Leone, Uganda, and Zimbabwe.

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Other Avenues Vultures Take

• Vultures use the threat of litigation to
  intimidate governments and officials into signing
  away interests in their natural resources
  (copper, oil, diamonds, etc).
• Resource rich countries are prime targets for
  these Vultures who strive to operate outside
  public scrutiny.

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Arguments Vultures Make

• Vultures help keep the countries honest by
  requiring them to pay their debts.
• WRONG. The deceitful and under-handed tactics
  taken by Vultures actually impede some countries
  from paying their obligations to other creditors
• Vultures endeavor to gain seniority to legitimate
  creditors who have engaged in good faith
  negotiations with countries.

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Arguments Vultures Make (cont)

• These countries are merely trying to avoid debt
  payments.
• WRONG. Most are trying to balance the need to
  fulfill their obligations for basic human rights
  with their debt obligations.

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What can be done?

• Vulture Funds that sue and win funds from
  countries that have gotten debt relief are free
  riding on U.S. and other taxpayers that have
  financed poor country debt relief
• The activities of Vulture Funds should be
  regulated.

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Public Policy Responses

• Change laws in US, UK, and France (top 3 investor
  friendly legal systems) to outlaw sovereign debt
  profiteering Stop Vultures Act in the US
  legislation in development in the UK
• Require greater transparency and disclosures by
  hedge funds
• Expand support for the World Banks Debt
  Reduction Facility which buys up debt of poor
  countries that is vulnerable to litigation by
  Vulture Funds
• Develop international bankruptcy system for poor
  countries

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Investors Can Play A Role

• Commercial banks should commit not to on-sell
  debt claims they hold on poor countries to
  Vulture creditors. The Paris Club has already
  made this commitment. Shareholders in major
  commercial banks can raise this request to
  management.
• Hedge fund investors could raise concerns about
  Vulture Fund activities housed within hedge funds.

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Resources for more information

• TransAfrica Forum
• www.transafricaforum.org
• Jubilee USA Network
• www.jubileeusa.org
• Africa Action
• www.africaaction.org