Vulture Funds Curbing African Development

In late 2012, vulture funds came to light with the bold seizure of an Argentine naval vessel, the ARA Libertad, in the Ghana port city of Tema. After two-and-a-half months under the control of the U.S.-based vulture fund NML capital — run by billionaire Paul Singer — the International Tribunal for the Law of the Sea in Hamburg ruled that the seizure was illegal and ordered the immediate release of the ship. While NML’s $1 USD billion suit against Argentina that prompted the confiscation of the vessel sheds some light on vulture funds, the devastating effect they have on African nations undermines debt relief from the world financial institutes to the poorest countries on earth.

In 1996, a joint initiative was launched by the International Monetary Fund (IMF) and the World Bank to provide debt relief to Heavily Indebted Poor Countries (HIPC). The goal of this project was to help the poorest nations manage their debt burden. In 1999 the initiative was improved to provide faster, deeper and broader debt relief. It was expanded again in 2005 to coordinate with the Millenium Development Goals (MDG), supplying 100 percent debt relief on eligible loans from the IMF, World Bank and African Development Fund (AfDF).

This program was designed to help HIPCs with debt relief in order to redirect funds that were previously appropriated to make payments to creditors to now be utilized in funding the state’s poverty reduction strategy, as well as fund development projects. Both which are important to evolving their destitute economies.

However, true to their name, vulture funds swooped in on the opportunity and feasted on the leftovers.

As a result of defaulted debts, a secondary sovereign debt market came into existence to help alleviate the growing risk associated with lending to sovereign states. Vulture funds prey on sovereign debt on the secondary market, paying pennies on the dollar to own the debt of a sovereign nation. Then, undermining the progress achieved under the HIPC Initiative, they refuse to enter into any negotiations for debt reduction, or any bilateral agreement negotiation with the debtor nation. Instead, the fund turns around and sues the state for the full value of the loan, plus interest, arrears and legal fees, attempting to recover 3-20 times the purchase price of the debt. These litigations are usually held in U.S. or European courts.

So what’s wrong with collecting the full amount owed by a debtor country?

Vulture funds undermine the exact principles that the world financial organizations and the international forum itself determined would be beneficial to the countries on the brink of potential economic collapse. By establishing the ground rules for debt relief, they created an infrastructure in which developing nations can play catchup with the rest of the world. But what good are debt reductions for development projects if a creditor will turn around and call the full value due for the sake of profit?

The greater concern is how often this devious tactic has paid dividends in the last 20 years. Twenty-five successful suits have been won by vultures, yielding nearly $1 USD billion. In addition, there are still numerous outstanding lawsuits between vulture funds and HIPCs.

Although two of the pioneer cases were against Argentina and Peru, most of them have targeted African nations, especially in more recent years. This trend is not likely to change as over 80 percent of all HIPCs are located in Africa.

Some people have argued in the past that vulture funds divert attention away from corrupt governments and the campaign against them will not help the common people in impoverished nations. While corruption in impoverished nations remains a harsh reality, not all of the nations targeted by vulture funds are considered corrupt. In fact Zambia — a country that fell victim to a $USD 15.4 million dollar vulture lawsuit in 2007 — has been gaining significant progress in both economic advances and transparency. Furthermore, the big players in vultures are billionaire investors attempting to capitalize from the circumstances and add to their enormous wealth. It is hard to justify that the funds would be better suited in the pockets of rich westerners, despite the potential for corruption.

Finally, the funds themselves are not free from shady dealings or corruption. Most of the funds are very secretive regarding their ownership. Generally they are established in offshore tax safe havens such as the British Virgin Islands or Cayman Islands. Additionally, many of them are formed simply for the extent of one particular lawsuit and then dismantled. In one particular case a big player in the vulture fund game — Michael Sheehan — obtained the debt illegally from the Bosnian government and the former Bosnian Prime Minister is facing corruption charges based on the details of the transaction. With all the advantages in such a case, the financial organizations are still forced to resort to shady and underhanded tactics to obtain high returns.

Ultimately vulture funds undermine internationally developed programs for the sake of pure profit at the expense of the weakest economies on earth. While certain countries which have played host to vulture lawsuits in the past have begun to enact legislation weakening the suits, there is no inernational unification on curbing vulture funds. However, if they continue to thrive, then money intended for trade or other creditors can be snatched from the hands of the country that owes the immediate debt. This only hurts HIPCs, which in turn, hurts Africa as a whole. Crippling development among the weakest countries only creates a larger rift between rich and poor, which will utlimately damage progress on the planet.