What are vulture funds?

Emerging countries that contract debts may change the institution(s) they are dealing with, without having any say in the matter, because of the secondary debt market. This is a sort of secondhand market where debt bonds are bought and sold. A creditor can resell some of his bonds to an investor or an organization which then becomes the creditor. The value at which these debt bonds are sold varies from day to day, and the daily market rate depends only on the confidence—or lack of it—that the financial milieu has in the emerging country in question.

The phenomenon is growing: private institutions buy, at a low price, the debts of struggling countries from creditors who want to get rid of them in order to get back at least part of their money. Motivated solely by profit, these new unscrupulous creditors wait until the economic situation of their debtor country improves slightly (for example, when they reach the completion point of the HIPC initiative or renegotiate their Paris Club debt, or their exports benefit from a rise in the export price index); as soon as there is hope of a light on the horizon, the creditor brings a lawsuit against the indebted country, demanding total and immediate payment. The creditor thus makes an enormous profit, having bought the debt bonds at a ridiculously reduced price with no thought for the social and human consequences. This is the sinister activity of “vulture funds,” which are well adapted to unstable situations where corruption is rife. The developing country sometimes has to pay a price higher than the small reductions they have struggled to obtain.

Let us see in detail how Peru was condemned to pay $58 million for debts that had been bought for $11 million.180 In 1996 the American vulture fund Elliott Associates paid $11.4 million to buy Peruvian foreign debt bonds (bonds issued by the treasury of Peru). They had a face value of $20.7 million. Some time later, under the aegis of the Paris Club and the London Club and with the participation of the IMF and the U.S. government, a plan to reduce and to restructure the Peruvian debt was adopted.

Elliott Associates refused to take part. They did not want to concede any debt reduction. On the contrary, shortly afterward they sued Lima for full repayment (face value) plus capitalized interest—in all, a total of $35 million. Peru refused and Elliott Associates took the case to a New York court, which ruled against them. However, the Court of Appeals overturned this ruling in 2000 and Elliot Associates achieved “preferred creditor” status (that is, they were to be repaid first!). Peru was then ordered to pay the total amount of $58 million, since unpaid interest had continued to accumulate during the four years of the court case! Elliott had made a tidy profit of $38 million, with its lawyers sharing between them the modest sum of $9 million. Apparently Elliott Associates were old hands at the game, as they had already pulled off the same trick in Panama, Ecuador, and Paraguay, picking up $130 million in the process.

Let us look at another example. In 1979 Romania lent $15 million to Zambia to buy Romanian tractors. But because the price of copper (Zambia’s principal export) fell, Zambia was accumulating delays in payment. In 1999 the value of the debt remaining was estimated at $30 million. At that moment, Donegal International, a vulture fund belonging to the Debt Advisory International group and registered in the British Virgin Islands—a notorious tax haven—came on the scene and offered to buy up Romania’s debt for $3.3 million.

When Zambia reached the point when some of its debt was canceled as part of the HIPC initiative and then the MDRI (see chapter 7), Donegal International then sued Zambia for repayment of the total amount plus late interest payments—in all $55 million. This was seventeen times its initial investment and more than the reduction of debt received that year by Zambia ($40 million). To achieve its ends, Donegal International also demanded the freezing of Zambian assets in the United Kingdom.181

In April 2007 the High Court in London awarded a reluctant victory to Donegal International, ruling that Zambia was to pay them $15.4 million plus part of the legal costs—a total of about $17 million, which is a considerable amount in view of the initial $3.3 million paid out by Donegal. Even though the High Court criticized Donegal and its boss Michael Sheehan for their “dishonest” actions and even though it considered the amount to be exorbitant, nevertheless, the court ruled that the agreement was legal. Economics correspondent Ashley Seager, in an editorial in The Guardian, pointed out that the same Sheehan is also director of Walker International, a company that sued Congo-Brazzaville for $13 million.182 It is actually impossible to establish how many vulture funds are currently active since they are often created on a one-off basis to prey on a specific indebted country.

Banks need to consider carefully the ethical implications of their decisions rather than simply clearing the debts off their balance sheets for the vultures to pick over. . . . Funds are incorporated in jurisdictions that preserve shareholder anonymity, which means it is impossible to access their backers. It is impossible to lobby shareholders about the funds’ policies in respect of poor country debt.

—RONNIE KING, Advocates for International Development, 2007

This brings us to a basic point: vulture funds are not simply a foreign body, totally alien to the system, resulting from the greed of a few unscrupulous speculators. Instead, they all too often do the dirty work of other creditors, for example the big banks, who cannot operate openly for fear of bad publicity.

The example of Congo-Brazzaville—another country under attack by vulture funds—is enlightening. Led by the dictator Denis Sassou Nguesso, dutifully subservient to the oil interest of the French oil company Elf (now part of Total), Congo reached the decision point of the HIPC in March 2006—which made it eligible to be considered for the relief of part of its debt (one of the biggest in the world per inhabitant; see Q 27). Even though international financial institutions were hesitating because they suspected embezzlement and concealment of funds, France applied pressure for the debt relief to go through. Vulture funds had been harassing the Congo for several years. Kensington International, which had paid $1.7 million to buy four debts (dating back to the 1980s) with a total face value of $32.6 million, won their lawsuit in a British court and Congo was ordered to pay them more than $121 million.

The story gets really juicy when the Congolese authorities clothe themselves in nationalistic righteousness and admit that although the SNPC—the Congolese National Oil Company—had to set up dummy corporations based in tax havens to conceal part of their oil revenue, it was not so that the ruling clique could embezzle the funds. Rather, it was to protect the revenue from vulture funds that were attempting to freeze Congolese assets abroad so that they would be available to be seized following legal decisions.

In January 2006, Isidore Mvouba, Congolese prime minister, even dared to say: “Our country is being harassed by vulture funds that are doing everything they can to prevent Congo from reaching decision point. They don’t balk at organizing misinformation campaigns in the United States concerning the Congo. . . . We have had to protect the money of the Congolese people so that it does not fall into the greedy hands of these predators. . . . Nevertheless, the lawsuit which ruled against the Congo has at least resulted in attracting attention to the international financial predators who are ruining with impunity the developing countries.”183

Lawsuits Filed by Private Creditors against HIPC CREDITOR LOCATION OF CREDITOR Cameroon Winslow Bank Del Favaro Sconset GraceChurch (Paris) Antwerp Bahamas Italy Virgin IsI. (UK) Cayman IsI Virgin IsI. (UK) Congo-B GAT NUFI-AIG FG Hemisphere AF CAP Inc Berrebi Kensington Int Walker International Commissimpex Lebanon United States United States Bermuda France Cayman lsl. Virgin lsl. (UK) Congo-B Congo-K (DRC) FG Hemisphere KHD Humboldt Wedag AG Koln United States Ethiopia Kintel Yugoimport Bulgaria Serbia Guyana Citizens Bank Booker Export Services Guyana UK United States Honduras Laboratoires Bago Argentina Nicaragua LNC Investments Hemisphere Greylock Global Opp Hamsah Investments Inex, 14 Oct Krusevac, IMT AD, DP FAP, MFK Corp United States United States Virgin IsI. (UK) Virgin IsI. (UK) Serbia Uganda Banco Arabe Espanol Transroad Ltd Industry Machinery 14 Oktobar Sour Fap Famous Iraq Fund for Int Development Shelter Afrique Spain UK Ex-Yugoslavia Ex-Yugoslavia Iraq Kenya Sao Tomé & Prin. Annadale Associates UK Sierra Leone J&S Franklin Ltd Umarco Executive Outcomes Chatelet Investment Scancem Int UK France Sierra Leone Sierra Leone Norway Zambie Connecticut Bank of Commerce Donegal United States Virgin lsl. (UK) TOTAL

The Congolese people are thus powerlessly attending to the ferocious struggle for oil revenue fought between those close to power and the vulture funds. Whoever wins, the people know that unfortunately they will not benefit from the wealth that belongs to them. Asking the IMF not to grant debt relief would not be a step toward a just and lasting solution. Vulture funds are a catalyst, bringing to light that the economic model promoted by the IMF in the name of the principal creditors since the 1980s is structurally a creator of debt, of corruption, and of poverty.

The only way toward a solution inevitably calls for a fundamental change in the economic model itself and the refusal, firstly, of the domination imposed by the IMF and the World Bank through debt on the Congolese people to the benefit of rich creditors and multinationals; secondly, refusal of the HIPC initiative that propagates this model and aims at quelling all forms of opposition to the present economic model imposed from outside; and thirdly, the refusal that dictators (in this case Sassou and his entourage supported by France and Total—inheritors of the corrupt empire of Elf) can monopolize wealth. In the struggle between the Sassou clan, the vulture funds, and the Bretton Woods institutions it is not acceptable to criticize one in order to then defend the interests of the other. That would be a false opposition as they all contribute to the same logic. Vulture funds are visible evidence that the economic model based on debt is a runaway train.

More than forty legal proceedings have taken place or are still under way, and this only in the poorest and most heavily indebted countries. Court rulings have already granted nearly a billion dollars to vulture funds. This turns debt into a most profitable market.

In short, a country that “benefits” from an agreement with its creditors to reduce its debt may see its debt increase because, as its financial situation improves, its solvency increases and the commercial value of its remaining stock increases. On the other hand, if a country is late in paying back its debt, then its commercial value decreases. If we can draw a conclusion it should be this: in a market economy, it is better to cancel or repudiate the whole debt.

Toussaint, Eric. Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers (pp. 216-240). Monthly Review Press. Kindle Edition.