VULTURE FUNDS

A Systematic Threat to Globalization Efforts
By Melissa L. Barnhart

Economic globalization refers to the integration of the developing and developed world through the increased flow of goods and services, capital, and labor. Though wide and varied in its processes, the great hope of globalization is commonly understood: that it will raise living standards throughout the world.1 Economics drives globalization, but the elites that control global decision-making bodies shape globalization to further their own interests.2 This unfortunate reality is most clearly exemplified when analyzing recent debt relief efforts.

Many impoverished countries have been accumulating debt since the 1960s; it was at this time that an international financial crisis led to unrestrained lending on the part of banks without much thought as to how governments, especially those in the developing world, would repay loans. The severity of the crisis became abundantly clear in the mid 1970s, when the prices of raw commodities began to fall, and interest rates and oil prices rose. Governments in Africa and Latin America — many of who applied loans to lofty development projects and/or to build up oppressive regimes — quickly found themselves unable to finance the burdensome debts that accrued. As a response, large industrialized countries and international financial institutions (IFIs) began developing political mechanisms such as the Highly Indebted Poor Countries (HIPC) Initiative and the G-8 Multilateral Debt Relief Initiative (MDRI) to cancel these debts that were effectively hindering sustainable growth, poverty alleviation, and economic development. Their relief efforts, however, remain undermined by the looming threat of vulture funds.

Vulture funds signify those financial organizations that buy the defaulted debt of poor countries for pennies on the dollar, then demand repayment of the initial debt.3 They maximize their profit not when holding out in a restructuring negotiation with hopes of being paid full value, but when suing governments for the initial debt plus high levels of interest. The latter scenario ensures much better payoffs and tremendous profits, as seen in the Zambian case. In late April 2007, Donegal International, a vulture fund registered in the British Virgin Islands, collected US$15 million for debt acquired for just $3 million. With over 70% of its population living in poverty and one in five people living with HIV/AIDS, Zambia expected to only benefit after qualifying for G-8 debt cancellation in 2005. Quite conversely, the US$15 million payout severely limited the impact of the US$40 million relief.4 This trajectory is hardly unique to Zambia; Debt Relief International reports that at least twenty HIPCs have been threatened with or subject to legal action by commercial creditors and vulture funds since 1999.5 These countries include Liberia, Nicaragua, Honduras, Tanzania, Uganda, and Niger. More than two-thirds of the lawsuits occur in American and British jurisdictions, and the indebted governments almost always lose. So, the term “vulture fund” is certainly appropriate, as companies swoop in and prey on distressed environments.6 In this context, these countries are more accurately described as vulnerable and victimized than “developing.”

The activities of vulture funds obstruct the process of securing genuine debt relief for some countries, while prohibiting others from investing debt relief funds in much-needed development. According to the International Monetary Fund (IMF), a country must sufficiently meet a demanding set of criteria to be deemed eligible for interim relief; the full and irrevocable reduction in debt under the HIPC Initiative requires a further track record of good performance under IMF-supported programs. As the developed world makes progress in overhauling the international debt architecture, and the forty-one countries found eligible or potentially eligible for HIPC Initiative assistance establish programs to ensure that relief packages benefit the poor, vulture funds wait in the wings to seize newly freed resources.7 When successful, they turn these resources — resources intended to build infrastructure, enhance education and healthcare, and ultimately service a citizenry — into corporate gain. Losses are profoundly felt in vital social sectors, and often freeze the wages of government employees, teachers, and nurses.8

Globalization simply will not “work” if Zambians continue to earn just over US$1.00 a day while the secondary sovereign debt market (which vulture funds, with their ambiguous, ever-changing tactics, actively participate in) features a US$6 trillion annual turnover.9 The irresponsible and immoral lending practices employed by vulture funds only widen the already-growing gap between rich and poor. An indebted African country, for example, cannot contribute to global economic processes if it cannot meet the basic needs of its people. Ultimately, globalization will not lead to unprecedented prosperity in a world of utter inequality.

Perhaps the bigger problem, however, lies in the message sent to indebted communities: the rich and powerful perpetuate a system of give-and-take, and cannot be trusted to dictate mutually advantageous international exchange. Why would an indebted country expect globalization to deliver on its promises after experiencing letdown after letdown, from exploitative colonies and modern-day institutions like vulture funds? Moreover, why would those benefiting from the current system advocate for change? In theory, globalization seems like the solution; the success of it, however, is entirely contingent upon its management.10 The developed world must adopt binding legal measures not only to prevent predatory litigation from undermining debt relief initiatives, but also to signal its interest in preserving and advancing the developing world. In order to achieve international solidarity, developed countries must take a step back and acknowledge that the tangible successes of globalization — the spread of technology, the production of new goods at cheap prices, etc. — will follow the spread of knowledge. That said, the developed world should be highly concerned with the self-interested implications reflected in policy, including policy directed toward superficially noble causes such as debt relief.

*It is worth noting that vulture funds function as just one obstacle within the unfinished agenda on international debt. The HIPC Initiative contains flaws and constraints, and should not be seen as the end-all solution to fighting poverty. The Jubilee Act for Responsible Lending and Expanded Debt Cancellation (HR 2634/ S 2166) — current legislation to expand debt cancellation in impoverished countries and improve creditor behavior — signifies the most comprehensive approach to spearheading this agenda to date.

References

Photo courtesy of davetrainer, sama sama – massa, andrésmh

Advertisements

3 responses to “VULTURE FUNDS

  1. We agree that purchasing third world debt in an effort to unfairly leverage a vulnerable country’s defaulted debt for pennies on the dollar only to turn around and demand repayment is an unconscionable business practice. NATO countries need to demand greater oversight from these private and public sovereign funds and their practices. That being said, vulture funds provide a vital function as a debt and liability disbursement vehicle where otherwise, one may not exist. Perhaps the answer is an international coalition.

  2. This is ridiculous. The total amount of debt under litigation is a fraction of the amounts cited in the IMF’s 2007 report, which itself cited approximately $1.5 billion of sovereign debt litigation. This amount is a tiny fraction of global aid flows and represents less than one half of one percent of total indebtedness of severely indebted lower income countries… So where is the “systemic threat”?

    And where is the statement,”Globalization simply will not “work” if Zambians continue to earn just over US$1.00 a day while the secondary sovereign debt market (which vulture funds, with their ambiguous, ever-changing tactics, actively participate in) features a US$6 trillion annual turnover.9″ Find support? What does the size of the secondary market for debt have to do with the average income of Zambians?

    Unfortunately, like much that is written on this topic, this article seems to be polemic masquerading as serious research…

  3. Thank you for your comment. We would greatly appreciate it if you could recommend articles, books, or essays that you consider informative on the topic of Vulture Funds. If you have written essays examining this topic, we would welcome a submission from you to perhaps pose as a companion piece to what we currently have available on the topic.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s