Vulture Funds

"Vulture funds" are private hedge funds which buy Third World countries' debt cheap and then sue for full repayment."

Vulture fund must not take cash from Zambia, say campaigners

Oxfam Press Release, February 15, 2007

In what is likely to be a welcome surprise to Zambia, the Royal Courts of Justice today ordered that the country should pay a much-reduced sum (to be decided next month) to US company, Donegal International, as repayment on debts incurred more than a decade ago. Donegal's claim was for over US$55 million, but the judge decided that although the original agreement with Zambia was legal, the award should be significantly less.

Debt campaigners, Oxfam and Jubilee Debt Campaign, said that Donegal - a 'vulture fund' registered in the British Virgin Islands and run by US businessman Michael Sheehan - should not accept even the reduced amount because Zambia, one of the poorest countries in the world, has qualified for debt relief and desperately needs the money it could bring. Donegal bought the debt from Romania in 1999, for less than $4m, when Zambia was on the verge of renegotiating it.

UK Chancellor, Gordon Brown, has condemned vulture funds in the past. Campaigners say he should use his influence as chair of the IMF's Finance Committee to make sure that new regulations are devised, which prevent private companies from bypassing international debt rules and pursuing debts from very poor countries, even when they have qualified for debt relief.

In his judgement, Mr. Justice Andrew Smith said: "I have been driven to conclude that they [Sheehan and associate] were at times being deliberately evasive and even dishonest [Sheehan] was not merely careless but cavalier in presenting his evidence."

While considering the question of assigning costs, he pointed out in court that some delays had been caused to the trial because "put at its kindest," some of Donegal's witnesses were, "less than candid."

Adrian Lovett, Director of Campaigns and Communications at Oxfam said: "The judge was unable to dismiss the whole claim but it is clear that while the actions of Donegal International were not strictly illegal, they were immoral. When a country is as poor as Zambia, in desperate need of money to pay for basic services like health and education, it is unconscionable to pursue an inflated claim for a debt that should have been written off years ago. Donegal should not take the money."

Trisha Rogers, Director of Jubilee Debt Campaign, said: "There is a clear need for a fair, comprehensive and binding framework for dealing with poor country debt, which will ensure that commercial creditors will never again have the chance to profit in this way. Gordon Brown, as UK Chancellor and Chairman of the IMF Finance Committee, is in a strong position to make this happen. He has previously stated that he is against vulture funds: he should use his position to put a stop to their predatory practices."

The debt, originally owed to Romania for agricultural machinery and services, was accrued during the cold war. The amount claimed by Donegal was far more than Zambia is due to receive this year in debt relief - as agreed at the G8 meeting in Gleneagles in 2005. It is equivalent to more than six months of Zambia's health budget.

Since qualifying for debt relief, Zambia has introduced free primary rural healthcare and announced plans to employ 4,500 teachers and hundreds of nurses. But one in three children in Zambia still does not go to primary school, nearly 80% do not receive secondary education and the average income is barely $1 a day. Donegal International's claim threatens to undermine Zambia's plans for poverty reduction.

Notes to Editors

- Donegal International is closely connected to Debt Advisory International of Washington, USA. Michael Sheehan describes himself as a debt advisor.

- The $15 million loan from Romania (to buy tractors, agricultural machinery etc) was incurred in 1979.

- In January1999, Donegal International bought the debt from Romania for $3.28 million. This represented 11% of the value of the debt, which was then assessed at $29.3 million.

- There have been at least 40 lawsuits by commercial creditors against Heavily Indebted Poor Countries.

- So far commercial creditors have delivered only 5% of the debt cancellation expected through the Heavily Indebted Poor Countries initiative. The HIPC Initiative was launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. To be considered for HIPC Initiative assistance, a country must fulfil specific criteria which are fully explained on the IMF website:

http://www.imf.org/external/np/exr/facts/hipc.htm

- In Zambia one in 5 people are infected with HIV, and life expectancy has dropped to 38 years.

- Young people aged 20-25 actually have less education than their parents' generation.

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Zambia loses 'vulture fund' case

http://news.bbc.co.uk/, February 15, 2007

A High Court judge has ruled that Zambia must pay a substantial sum to a so-called "vulture fund".

British Virgin Islands-based Donegal International paid less than $4m (£2m) for a debt the African nation owed, but sued Zambia for a $42m repayment.

It said its bill was the result of interest and costs, but the judge has indicated that Zambia should pay less.

The ruling has angered anti-debt campaigners, who say it will undermine Zambia's plans for poverty reduction.

The judge ruled against Zambia's application to dismiss Donegal's claim, but at the same time proposed to end a freeze of Zambian assets secured by the fund.

Donegal, however, will have a chance to argue the case for a continued freeze of Zambian assets.

According to BBC economics reporter Andrew Walker, people familiar with the case believe that the judge will order Zambia to pay Donegal between $10m and $20m, less than half what Donegal sought.

Lawyers for Zambia, however, said the judgement was a victory for Zambia.

Janet Legrand of DLA Piper called the ruling "fantastic news for both the government of Zambia and its people".

The fight against Donegal's claim had been "entirely vindicated and [marked] a significant milestone in the efforts of [the Zambian government] to fight corruption and maintain a stable economic course".

Concerns

Vulture funds - as defined by the International Monetary Fund and UK Chancellor Gordon Brown among others - are companies which buy up the debt of poor nations cheaply when it is about to be written off, then sue for the full value of the debt plus interest.

There are concerns that such funds are wiping out the benefits which international debt relief was supposed to bring to poor countries.

A Zambian presidential adviser and consultant to Oxfam, Martin Kalunga-Banda, said $42m was equal to all the debt relief it received last year.

He told the BBC that this would take a serious toll on education in Zambia.

"It also means the treatment, the Medicare, the medicines that would have been available to in excess of 100,000 people in the country will not be available," he added.

Mr Kalunga-Banda added that while the repayment might be legal, it arose from debts accrued when the country was under "an undemocratic system".

"The consequences of the debt are impacting on the people of Zambia," he said.

"The Zambians at that time did not even have even the capacity to know this was happening and that is probably what brings in this issue of unfairness."

'No comment'

In 1979, the Romanian government lent Zambia money to buy Romanian tractors.

Zambia was unable to keep up the payments and in 1999, Romania and Zambia negotiated to liquidate the debt for $3m.

But before the deal could be finalised, Donegal International, which is part owned by US-based Debt Advisory International (DAI) stepped in and bought the debt from Romania for less than $4m.

DAI founder Michael Sheehan was confronted by the BBC's Newsnight programme before the court ruling, but said only: "No comment. I'm in litigation. It's not my debt."

In 2002, Gordon Brown told the United Nations that the vulture funds were perverse and immoral.

"We particularly condemn the perversity where vulture funds purchase debt at a reduced price and make a profit from suing the debtor country to recover the full amount owed - a morally outrageous outcome."

Jubilee Debt campaigner Caroline Pearce said that vulture funds "made a mockery" of the work done by governments to write off the debts of the poorest - a key theme of 2005's Live8 concert.

"Profiteering doesn't get any more cynical than this," Ms Pearce said.

"Zambia has been planning to spend the money released from debt cancellation on much-needed nurses, teachers and infrastructure.

"This is what debt cancellation is intended for, not to line the pockets of businessmen based in rich countries."

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`Vulture Funds' Descend On Dying Third World Economies

by Dennis Small

Executive Intelligence Review, October 10, 2003

Argentine Finance Minister Roberto Lavagna used the high-profile forum of the annual meeting of the International Monetary Fund (IMF) and World Bank in Dubai, United Arab Emirates, to unveil on Sept. 22 Argentina's long-awaited proposal to restructure some $94.3 billion in public debt, on which the government had defaulted in December 2001. Lavagna's proposed "solution" to the world's longest-running and biggest public debt default, was to write off 75% of the debt's face value, and service the remaining 25% somewhere down the line.

Howls of outraged protest exploded from spokesmen for Argentina's international creditors, especially the speculators widely referred to as "vulture funds," which now hold most of the defaulted bonds. "This is not a serious offer," blustered Christian Stracke, head of emerging market research at CreditSights. "Scandalous, offensive, morally unacceptable," fumed Italian bondholder and lawyer Mauro Sandri, without a trace of irony.

Then came the threats of legal action. "There is no way Argentina will avoid going to court with this offer," warned Stracke. London's Financial Times reported that "frustrated Japanese investors are trying to seize government land in Argentina's Patagonia, and German investors are trying to appropriate Argentine-embassy assets to recoup losses." Rumors even began to swirl that the Argentine Presidential jet would shortly be seized.

In fact, one vulture holding defaulted Argentine bonds has already succeeded in winning just such a judgment. On Sept. 12, a New York court ruled in favor of Kenneth Dart, of Dart Container Corp., granting him a $700 million judgment. Dart will have the right to start seizing Argentine assets at the end of October.

Finance Minister Lavagna told a TV interviewer: "In this particular case, it's a vulture fund for $700 million.... These funds that buy the bonds do it for no other reason than to sue governments." And Argentine President Néstor Kirchner told his advisors, according to the daily Clarín, that most of the defaulted Argentine bonds have in fact been bought up by the vulture funds, and that they paid an average 20 cents on the dollar for them.

In other words, their fulminations notwithstanding, the vultures stand to make a killing, even with Argentina paying on only 25% of face value-let alone if they are able to collect dollar-for-dollar.

LaRouche: This Is Fascism

Informed of the Argentine developments, U.S. Presidential pre-candidate Lyndon LaRouche denounced the vulture funds-which typify a very large part of the global financial system today-as being "fascists, just like those who put Hitler in power. These bastards," LaRouche elaborated, "care even less than President Bush for the stability of the system. Now you're looking at fascism in the face. And if you want to characterize it, you would say about the vulture funds' reaction, this gives you the mentality of the same kind of fascists who sacrificed the human race, including all those who died eventually in Auschwitz. This is why people died in Auschwitz: because these vulture funds had to have a government which would do the kind of job they demand."

As for the New York court finding in favor of Dart, LaRouche noted that it clearly goes beyond the court's jurisdiction and competence, to assess the value of debts owed by a sovereign state. This stinks of Teddy Roosevelt's "Gunboat Diplomacy" to collect the debt, LaRouche concluded.

The Argentina case is in fact typical of the entire global financial bubble: None of the debt can actually be paid, and the only real policy issue is whether to put people's welfare before the debt-as LaRouche demands-or to try desperately to maintain the illusion that the debt is somehow still performing, no matter what the human cost. In that latter camp, the vultures are gaining ground against those who are still trying to maintain "stability," and revive the corpse of the world financial system, if need be by swallowing sizeable debt write-downs. The vultures prefer to descend on the body now, and be first to pick over the bones. For them, it's every vulture for himself, and the devil take the hindmost.

Argentina, of course, had a choice: to go the LaRouche route, or to become an economic cadaver. The country reached that fork in the road back in December 2001, when interim President Adolfo Rodríguez Saa announced to a cheering Congress that he would stand up to the country's creditors, and declared a foreign debt moratorium on the spot. But Rodríguez Saa was unable to rally sufficient support, domestically and internationally, for this courageous approach, and Argentina's frightened political class and other institutions allowed him to be toppled on Jan. 1, 2002. This set Argentina on the course of submission to vulture economics that it remains wedded to, to this day.

Argentina Still Can't Pay

Rhetoric aside, President Kirchner has, in fact, never seriously considered breaking with the IMF. On Sept. 10, his government struck an 11th hour deal with the Fund, under which Argentina agreed to pay $2.9 billion it owed the IMF. That amount had come due on Sept. 9, and for one day, Kirchner went into technical default against the IMF, in search of more "lenient" terms under which Argentina was to be raped by its creditors.

"We were in default for more than 24 hours," Kirchner reportedly told his closest advisors during a plane ride to New York on Sept. 22. "I could have fallen, but had that happened, the whole IMF would have fallen with me," he blustered.

Kirchner was referring to the widely known fact that a default against the IMF or the World Bank, as opposed to a mere private lender, is capable of bringing down the entire international financial system. Such a default could prove contagious with other countries, including neighboring Brazil, which has a public debt about twice the size of Argentina's. As an Argentine Finance Ministry source told La Nación newspaper, the possibility of an eventual Brazilian debt default "is on a lot of people's minds." Any such sovereign default against the IMF would likely lead to a downgrading of its credit rating, and that could mean the effective bankruptcy of the IMF itself, and of the entire IMF system.

On Sept. 10, Kirchner chose to defend that system, and struck a deal with the IMF, which, he was told, was a prerequisite for negotiating a write-down of the $94.3 billion in privately held government bonds. The IMF, in turn, was pressured by the Bush Administration to be "lenient" with Argentina, since the stability of the entire global system was considered a higher priority than collecting every penny-at least for now. As an unnamed Bush Administration source soberly told the daily Clarín: "Nobody wanted Argentina to again go into default with an international institution."

The IMF thus agreed to Argentina producing a 2004 Primary Budget Surplus, or PBS (with which to pay the public debt) of "only" 3% of GDP-whereas the country's more rapacious creditors had been demanding Brazil-style levels of 5%. The international financial media then ridiculously characterized the deal by saying that "the IMF blinked" in the face of Kirchner's "tough" negotiating stance. A manic George Bush further stroked the Argentine President's ego at a Sept. 23 reception at the United Nations, by greeting him from across the room in a loud voice: "Here comes the man who conquered the IMF!"

The vulture funds, for their part, were furious at how "lenient" the IMF had been with Argentina. As a Bloomberg wire reported, the Italian Mauro Sandri and other vulture bondholders "said they were outraged after Argentina reached an accord with the IMF two weeks ago, that ensures the government pays back multinational lenders while forcing losses on investors."

IMF spokesman Thomas Dawson defended their deal with Argentina by arguing that it "will lead to a sustainable debt position"-which is a lie. As one Buenos Aires economist told the Financial Times: "It's doubtful Argentina can even service its performing debt with that [a 3% PBS], let alone defaulted loans."

The reality is that Argentina is not going to be able to service its public debt, even after the 75% write-down. On top of the $94.3 billion in defaulted bonds-now to be written down to some $24 billion face value-Argentina has another $85 billion in supposedly performing public debt. Of that, about $70 billion is classified as "Senior debt," meaning that it is paid first, before the renegotiated defaulted debt. This "Senior debt" includes some $25 billion in new government bonds, that were issued after the December 2001 default.

So, even with massive write-offs, Argentina is staring down the barrel of a gun at well over $100 billion in public debt that it has to pay-an impossibility, given the ongoing destruction of its physical economy.

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