Post on 24-Jun-2015
When Globalization Fails:
Vulture Funds and Sub-Saharan Africa’s Debt Crisis
Lawrence Farry
Supervised by Professor James Desveaux & Kevin Riley, Graduate Fellow
Introduction
Multilateral debt relief to Sub-Saharan Africa is under threat. Corporations called vulture
funds have appeared on the global scene and manipulate economic and legal loopholes in order
to achieve profits. They act as “international debt collection agencies”1 by purchasing defaulted
debt that is about to be renegotiated and then claiming the full amount of the debt plus interest
and other costs in international courts. In this way, they bypass other creditors – many of whom
are providing debt relief – and make full claims for debts that the countries can barely afford.
Often, debt relief that is intended to help the country move out of poverty is used to pay the legal
judgments granted to litigating commercial creditors like vulture funds. While morally
reprehensible, vulture fund activity is perfectly legal. Sovereign debt can be traded on open
markets. Developing countries find it difficult to contest debt transfers because their debts are
often in arrears. And all the while, international courts – or rather national courts whose rulings
hold international force – provide the assurance that the full amount of a debt can be recovered.
This scenario is symptomatic of a gap in the globalization process. Specifically, globalization has
occurred on dual tracks of economy and politics. The former track has advanced at a rapid rate –
largely due to advances in information technology – and electronic financial markets and free
trade are the results. Political globalization, however, has struggled to keep up. National
sovereignty is prized in the global system and international laws and regulations are weak and
difficult to enforce. This paper demonstrates how the globalization gap allows vulture funds to
thrive.
Question/Hypothesis/Theory/Significance
Question
Why does the global financial system allow vulture funds to exist?
1 Desveaux, James. Seminar Discussion. 2007.
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Hypothesis
Broadly, vulture funds exist because economic globalization has outpaced political
globalization. This often allows economic conditions alone to dictate activity in international
financial markets. Therefore, when undervalued debt in emerging markets can be bought and
claimed in international courts without international oversight, a company will exploit this
condition. In the case of vulture funds, a company purchases the debt of a developing country at
a low rate, holds out during sustainable debt renegotiations, and then sues the country for the
original amount of the debt plus interest and other costs in an international court. The high
tradability of debt coupled with weak international regulations causes vulture funds to find the
necessary loopholes in order to operate.
Theory
This hypothesis of dual-paced globalization not only accounts for the phenomenon of
vulture funds but also plausibly explains other observed disparities between international
economic activity and international economic standards. The existence of child labor would be
but one example. Vulture fund tactics also highlight the gap between economic and political
globalization. The vulture funds are often registered in countries with little to no government
regulation of corporate activity. This seems to vindicate the claim that they intentionally attempt
to avoid national laws when operating in the global economy. The timing of vulture fund
lawsuits often coincides with World Bank and International Monetary Fund approval of
multilateral debt relief. This demonstrates that vulture funds pursue economic profits even if
doing so hinders the goals of international law. Vulture funds actively undermine international
debt relief efforts in order to serve their own goals. In this way, they not only work between the
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gaps of economic and political globalization but also manipulate that gap to facilitate their
monetary claims.
Significance
By understanding how the global financial system allows vulture funds to exist,
policymakers can learn how best to close the globalization gap and shut out vulture fund activity.
The slow development of international law relative to the fast pace of economic globalization
creates a series of gaps in the international system. Global problems like vulture funds, child
labor, and environmental degradation are the inevitable results. Only by closing the globalization
gap and advancing the spread of international law can these problems be solved. Until then the
global south, especially Sub-Saharan Africa, suffers under the burden of multinational corporate
irresponsibility. Mitigating the effects of vulture funds in Sub-Saharan Africa can be justified on
many levels. From a humanitarian perspective, vulture funds increase human suffering by
diverting funds that were intended for development. From a social justice perspective, vulture
funds perpetuate the economic inequalities of the post-colonial era. From a global security
perspective, vulture funds fuel resentment toward the West and maintain poverty, the breeding
ground for terrorism, in the developing world. Halting the claims of vulture funds can even be
justified from a legal perspective. African debts are largely the result of irresponsible lending by
Western nations and banks and irresponsible borrowing by corrupt leaders and governments. The
burden of this unsound financial activity should not fall on the poverty-stricken populations of
Sub-Saharan African countries.
Methodology
The research paper focuses on the activity of vulture funds in Sub-Saharan Africa. The
research findings are divided into two broad categories: the African debt situation and the
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development of the vulture fund industry. The first section briefly describes the Sub-Saharan
African debt crisis and the development of the international financial system. The vulture fund
section describes the history of vulture funds and outlines their techniques and tactics. The
section also provides a case study of Zambia and highlights some potential policy options. The
discussion of vulture funds hints at the broader problem of a weak international political
framework to deal with global economic challenges.
In researching the background section, the paper relies heavily on previous scholars’
work. Specifically, books dealing with African development and the World Bank and IMF will be
essential to the discussion of debt in Sub-Saharan Africa. The second section on vulture funds
will incorporate the most original research. First, the paper will use academic and journalistic
articles to piece together a loose history of vulture funds. Non-governmental organizations like
Jubilee Debt Campaign have published basic historical accounts that act as a good starting point.
Second, the paper will draw on interviews, legal summaries, and articles to discuss the tactical
approaches that vulture funds have used to navigate national and international laws. Next, the
paper will analyze court documents, government documents, and media coverage in explaining
the specifics of the Zambian case study. This example demonstrates the inadequacy of the
international political system in dealing with global financial transactions. The House Sub-
Committee on Africa and Global Health recently held a hearing on vulture funds. The paper
discusses the key issues that were raised in the hearing, highlighting the prospective steps that
the United States could take in dealing with the problem of vulture fund investors. Jubilee USA,
along with a coalition of other advocacy organizations, has been at the forefront of the movement
to combat vulture funds. The paper utilizes many of the memos, research, and policy suggestions
that this coalition has produced.
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Overall, the paper’s research draws on a wide range of sources – academic, advocacy,
corporate, governmental, legal, and institutional – to provide a holistic view of vulture funds and
the threats they pose. The majority of these sources are readily available to the public, either
through library or online access. The interview sources were largely facilitated through work
with the Institute for Policy Studies in Washington DC. Ultimately, understanding the vulture
fund industry illustrates the broader problem of economic globalization outpacing political
globalization.
Sub-Saharan African Debt
The Sub-Saharan African debt developed as a result of the widespread poverty and
underdevelopment in the region. These conditions were largely created in the post-colonial years
when corrupt governments and economic mismanagement left the fragile states unable to cope.
Furthermore, the international free market created an unfair trading regime between Africa and
the West whereby economic aid to the continent was tied to the opening up of markets.
Unfortunately, the Western states did not always reciprocate, subsidizing their own farmers and
agricultural produce. This left the African nations unable to compete. In order to facilitate the
financing of Sub-Saharan African countries, three types of debt emerged. Multilateral debt from
institutions like the World Bank, IMF, and African Development Fund provide the bulk of funds.
Again, however, they often couple financing with strict economic requirements that force the
Washington Consensus upon the continent. This helps fuel economic globalization worldwide. A
second form of financing has been bilateral debt, whereby developed or middle-income countries
provide loans – sometimes in the form of services or supplies – to developing countries. Since
the 2005 Group of Eight Meetings in Gleneagles Scotland, these two types of debt have seen
massive debt relief. Large amounts of unsustainable debt remain but progress is underway to
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eliminate the debts of the poorest countries. This is largely coordinated through the Highly
Indebted Poor Countries Initiative. The third type of debt often proves the most challenging with
regards to debt relief. Commercial debt represents loans from banks and private funds to the
developing world. These debt agreements are between sovereign states and private institutions.
While these commercial creditors often abide by debt relief agreements, there are certain
litigating creditors that take developing countries to court in order to claim the full amount of
their debts. Vulture funds are one such type of litigating creditor.
Vulture Funds
Historical Overview
This history of vulture funds is a recent one. Increasingly open global financial markets,
as facilitated by advances in information technology over the last two decades, have allowed
investors to operate across multiple borders. Unfortunately, information technology has not had
as revolutionary an effect on international politics. Highly impoverished countries, like those in
Sub-Saharan Africa, often suffer the consequences of the gap between open markets and the rule
of law. The first case of a vulture fund traces back just over a decade. In 1996, Paul Singer used
his investment fund to purchase discounted Peruvian debt for $11 million. He then ended all debt
renegotiations and threatened to bankrupt the country unless it paid him $58 million. In the
interest of maintaining good standing in international financial markets, Peru paid the sum.2 The
basics of this scenario are laid out on the website of TransAfrica Forum, an African advocacy
organization in Washington DC. The case provides a simple outline of the vulture fund
methodology. A company purchases unsustainable debt from a developing country and, instead
of participating in debt renegotiations, the company threatens to sue the country if it does not pay
2 TransAfrica Forum. “Vulture Funds Info Brief”. <http://www.transafricaforum.org/VultureFundsFactSheet.html>. March 22, 2007.
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up. The debtor country can either fight its case in the courtroom, refuse to pay the debt, or pay
the company its claim. Since the first option usually results in a legal loss and the second option
results in a tarnished international credit, the third option is often the most viable.
Singer coordinated the Peru transaction through Elliott Associates, a subsidiary of his
larger company:
“Elliott Management manages hedge funds Elliott Associates L.P. and Elliott International L.P, which together manage some $6 billion of capital on behalf of large institutional investors and wealthy individuals and families. Founded in 1977 by Paul Singer, Elliott Associates is known for focusing on distressed or underperforming investments (including corporate, real estate, and sovereign debt), and prefers to be considered an activist investor rather than a so-called ‘vulture fund.’”3
This excerpt from a business profile directory provides three key insights. First, vulture funds
often operate as subsidiary companies of larger firms. This allows the litigating company to
register in a different, perhaps more favorable, domain than its parent company. Also, it allows
the litigating company to aggressively pursue the developing country’s debt while minimizing
the associated risks to the parent company. Second, the excerpt reveals the enormity of the
finances that the vulture funds deal with and the exclusivity of its member investors. This allows
the company to employ far greater legal resources than those of a debtor country. Third, the
excerpt reveals the ideology that Singer uses to justify his actions, namely a designation as
“activist investor” as opposed to “vulture fund.” Singer believes that he is simply enforcing
legitimate debts. He sees this as essential to maintaining lender confidence in emerging markets.
Also, he views it as a way to ensure responsible borrowing practices by often corrupt African
governments. This perspective is flawed, however, since it overlooks the fact that the lending
practices of creditors are just as irresponsible as the borrowing practices of developing countries.
The corrupt and despotic leaders who often took on these loans are further evidence of the
3 Hoovers. “Elliott Management Corporation”. <www.hoovers.com>. 2007.
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illegitimacy of the debts. Also, the debt relief initiatives of the World Bank and IMF show that
international standards – which generally favor Western practices – support a re-evaluation of
previously incurred debts. This contradicts Singer’s justification that the international lending
system needs debt enforcement. Regardless, however, Singer’s actions fall well within the
confines of the law – or lack thereof.
Many of today’s Sub-Saharan African debts are inflated after years of accumulated
interest and default penalties. In the case of Liberia, the majority of external public debts were
accrued during years of civil war and military dictatorship, leaving the current democratically
elected government with an illegitimate debt burden. Diverting further funds from these
developing economies is clearly not the correct approach to eliminating corruption and poverty.
As one Financial Times reporter euphemistically puts it, “Singer’s style… is based on using the
law to combat unfairness suffered by small investor groups.”4 As this same article reports, Elliott
Associates earns an average of 14.1 percent compounded returns per year. A more accurate
assessment of the situation might suggest that Singer’s style is based on manipulating legal
loopholes to cater to the financial interests of small investor groups. Because recent vulture fund
lawsuits have coincided almost exactly with multilateral debt relief for specific countries, the
intentions of such investors come under even greater scrutiny. Furthermore, Singer fails to
acknowledge that standard bankruptcy law states that all creditors should be treated equally. By
suing a debtor country for the full amount of a debt while other creditors offer concessions under
sustainable debt renegotiations, litigating creditors like Singer violate basic lending practice. The
liquidity of sovereign debt, as facilitated by economic globalization, and the prospect of
4 Davis, Phil. “Elliott’s activist chief has no time for cheats but denounces aggressive tactics”. Financial Times. April 10, 2006.
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unilateral litigation to claim debt, as facilitated by a lack of political globalization, cumulatively
allow for vulture fund investors like Paul Singer to operate.
With Singer’s 1996 success, other vulture fund investors soon followed. Singer himself
pursued two more vulture fund cases, one in Argentina and the other in the Republic of the
Congo. In the Republic of Congo case, Singer’s New York-based Elliot Associates sued the
Republic of Congo (Congo Brazzaville) for $400 million for a debt it acquired for $10 million.5
While vulture fund practices originated in South American countries, the method has
increasingly been used to target Sub-Saharan African countries. The IMF reports that, “The
HIPCs [Heavily Indebted Poor Countries] facing the most litigation are the Republic of Congo,
Guyana, and Uganda, with eight, seven, and six lawsuits respectively.”6 It is important to note
that these lawsuits represent cases brought by commercial creditors against developing countries.
A commercial creditor is not necessarily a vulture fund but rather any corporate entity that lends
money to a debtor country. Vulture funds are unique in that they seek out such debts, as well as
those held by creditor countries, and then avoid debt renegotiations in favor of lawsuits. While
the IMF provides a list of commercial creditors litigating against HIPCs, discerning the vulture
funds proves difficult. Vulture funds tend to be highly secretive and exclusive by nature and out-
of-court settlements often involve non-disclosure agreements with the debtor countries.
International regulations do not track vulture fund activity and the global economy allows
vulture fund corporations to structure themselves in multiple jurisdictions. This set of conditions
allows vulture funds to pursue their legal claims unchecked. Most national laws ensure that debt
restructurings treat all creditors equally within that country. Unfortunately, no such international
law exists.5 TransAfrica Forum. “Vulture Funds Info Brief”. <http://www.transafricaforum.org/VultureFundsFactSheet.html>. March 22, 2007.6 International Development Association and International Monetary Fund. “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation”. August 21, 2006.
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In general, litigating commercial creditors represent much of the same problem as vulture
funds. They are companies that hold out during debt renegotiations in order to claim debt
repayment in an international court. The cases are brought before courts in such cities as London
and New York, cities where the debt contract stipulates the debt will be enforceable. These
national courts – and their judgments to pay – have standing in the international financial system.
In the most recent IMF report, 44 litigating creditors have filed suit against HIPCs with 26
receiving judgments in their favor. Many cases are settled before reaching court and others are
still in arbitration. The scale of the problem becomes apparent when considering that the “total
reported claims under litigation amount to about US$1.9 billion, and are about 22 percent higher
than the total HIPC Initiative debt relief to be provided by commercial creditors.”7 This excerpt
emphasizes that litigating creditors, including vulture funds, operate in such a way that
undermines multilateral debt relief. The total amount of debt relief that commercial creditors
were supposed to provide to HIPCs is lower than the amount that a select few commercial
creditors have sought through litigation. In this way, litigating commercial creditors free ride on
the debt relief provided by non-litigating creditors.
The potential scope of the problem in future cases is even more drastic. Returning to the
Liberia example, that country alone has approximately $4 billion in external debt. Roughly $2.5
billion of that debt will be forgiven through multilateral debt relief from the World Bank and
IMF and through bilateral debt relief from developed nations like the U.S., Britain, and
Germany. The remaining $1.5 billion of debt represents the amount of the country’s external
public debt that is held by commercial creditors.8 With lawsuits by commercial creditors
returning favorable judgments, Liberia’s looming commercial debt represents a grave threat to
7 International Development Association and International Monetary Fund. “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation”. August 21, 2006.8 Jubilee USA Network. “Never Again.” Drop the Debt. Summer 2007.
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that country’s future development. Attempts to claim the debt would weaken the efforts of the
fledgling government of Ellen Johnson-Sirleaf to establish stability as the country emerges from
civil war and despotic rule. The decade-long history of vulture funds and their expanding reach
in the future coincide with increasingly open financial markets under the Washington Consensus.
International regulations have been slow to respond to these changes in global economic
conditions. Specifically, sovereign debts have emerged as a global market commodity but
international debt proceedings still abide by courts with weak international reach. While political
globalization is advancing international law, economic globalization has far outpaced it.
Tactics, Methods, and Political Connections
The strategic approaches to carrying out a vulture fund acquisition are for the most part
straightforward: form a legal corporation; locate a developing country with an unsustainable debt
burden; purchase the soon-to-be-written-off debt from an impatient creditor for a discounted rate;
pull out of any debt level renegotiations; wait until the country is about to benefit from
multilateral debt relief; sue the country for the full amount of the debt plus interest and costs in
an international court; pursue any and all means to acquire the resulting court award. There are,
however, certain techniques and connections that push the boundaries of legality and ethics.
While the following example deals with a vulture fund investor in Argentina and Brazil, the
techniques utilized are especially instructive for similar cases in Africa. The vulture investor is
Kenneth B. Dart. A Cayman Islands news source writes,
“The most talked about name in the Cayman Islands today, is that of Mr. Ken Dart, whose development company is poised to proceed, following recent planning approval, with a billion dollar project along the West Bay peninsula, which could sustain this country's hope of economic growth for at least the next five years. A very private individual and generous benefactor, a rare photograph of Mr. Dart appeared recently along with another near 2000 applicants for the grant of Caymanian Status (citizenship).”9
9 “Special Report: Who Is Kenneth Dart?” Cayman Net News. <http://www.caymannetnews.com/Archive/Archive%20Articles/November%202001/Issue%20123/Who%20is%20.
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This description of Dart portrays him as a “generous benefactor” and a boon for the Cayman
Islands economy. The final sentence of the excerpt reveals, however, that his development
project coincides with his application for Caymanian citizenship. The praising news blurb
demonstrates an interesting – and insidious – vulture fund technique. Dart curried favor with the
Cayman authorities through his development deal on the islands and received legal residence in
return. Not that the development deal was an outright payment; no doubt it will be a large profit-
maker for Dart. The key part of the story is that Dart manipulated his legal residency in order to
avoid the national laws of the United States. Any U.S. anti-corruption or tax-evasion laws could
now be avoided. More importantly, any future U.S. ruling against vulture funds making claims
against foreign governments become inapplicable to Dart. In this way, vulture fund investors
continue to operate in the global economy and, under the absence of strong international laws,
are able to find legal havens.
The next illustrative anecdote again involves investor Paul Singer: “He was the biggest
donor to George Bush and the Republican cause in New York City - giving $1.7m since Bush
started his first presidential campaign. Rudy Guiliani is the favorite to be the next Republican
presidential candidate and a leaked memo from his campaign shows that Paul Singer has pledged
to raise $15m for Guiliani’s campaign.”10 This excerpt from a BBC news article brings to light
some significant political connections. Because the U.S. president has the power to invalidate
any American citizen’s claim against a foreign government – and the responsibility to do so if
deemed appropriate – there is a potential conflict of interest for Bush to receive Singer’s
contributions, even if indirectly through the National Republican Party. This example
demonstrates how vulture funds purchase power in the political process, supporting the
html>. November 20, 2001.10 Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
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campaigns of candidates that uphold their unjust practices. As the vulture fund issue gains
traction in the new U.S. Congress, it will be interesting to observe how the administration
handles the issue domestically. Pressure to deal with vulture funds has also been increasing at the
international level. At the 2007 Group of Eight Finance Ministers Meeting, the United States
actively worked against including language on vulture funds in the group’s communiqué. The
United States argued that inclusion of such a provision would weaken commercial markets. It
instead chose to focus on environmental issues on which there was broader consensus.11 In this
way, international regulations on financial market participants fail to advance or receive the
legitimacy they need.
One of the most significant obstacles that vulture funds face is claiming their legal
awards. In some cases, the debtor countries are already isolated from the international financial
system and simply refuse to make payments. The country’s financial isolation prevents the
vulture fund from seizing its international assets. Other tactics on gaining payment remain:
“Among other strategies for collecting these judgments, vulture funds have aggressively sued oil companies doing business in West Africa to garnish royalties and other obligations arising out of oil concessions. The vulture funds have argued that garnishment writs preclude the companies from complying with oil contracts with the debtor states. As a result, the oil companies have faced the risk of contractual termination and even competing orders from foreign courts. Recent decisions of the Fifth Circuit Court of Appeals have rejected these garnishment actions in the context of in-kind royalties and have adopted rules that will govern efforts to garnish monetary obligations owed to the foreign states.”12
This excerpt from a legal publication describes an approach by the vulture fund FG Hemisphere
Associates against the Republic of Congo. FG Hemisphere Associates is a company of Keith
Fogerty and Peter Grossman and, according to its website, “specializes in problematic emerging
market assets… [including] sovereign… debt obligations.”13 Although FG Hemisphere won its
11 Moore, Matt. “Business Issues Slide Off Radar At G8.” Associated Press. June 6th, 2007.12 Vinson & Elkins LLP. “Developments in Garnishment of U.S. Oil Companies to Collect Foreign-State Debt”. V&E International Dispute Resolution. April 2, 2007.13 FG Hemisphere. <www.fghem.com>.
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initial case against the Republic of Congo, it lost subsequent lawsuits that attempted to claim the
legal damages. The description of the attempt to garnish royalties demonstrates the creativity and
ruthlessness with which the vulture funds pursue debtor assets. The conflicting orders that oil
contractors faced, both from the Republic of Congo government and the various foreign courts,
highlights the lack of legal clarity in the international political system. While vulture funds
typically benefit from this lack of clarity, in the case of in-kind royalties the debtor countries won
out. This was largely due to the Fifth Circuit Court of Appeals establishing standardized protocol
to follow in future cases. While claiming legal damages presents many challenges to vulture
funds, they often still prevail. This is largely because most countries, unlike the Republic of
Congo, are at least partially plugged into the international financial system or are so eager to
maintain good standing that they make the payments. Economic globalization has largely
integrated the financial activities of the world’s various countries. Financial claims against a
country, as legitimized by an international court ruling, can therefore be redeemed through
international financial organizations. Because no international laws explicitly prohibit the actions
of vulture funds, the international financial institutions are bound to help fulfill a litigator’s
claim.
Case Study: Zambia
The most recent case by a vulture fund against a developing country received a judgment
in late April 2007 and is largely responsible for the increased media attention that the issue has
received. The case is also a perfect example of the modern methodology of vulture funds,
highlighting key legal and ethical flaws in the system. The case has been covered extensively on
the BBC and has been picked up on other news sites. The story begins in 1979 when the
Zambian government borrowed $15 million from Romania in order to purchase agricultural
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supplies and tractors. Twenty years later, it was clear that Zambia would be unable to repay the
debt whose value with interest had ballooned to about $30 million. The Romanian and Zambian
governments began brokering a deal whereby the debt would be written off for a payment of $3
million. Before the deal could be finalized, however, Donegal International Limited offered
Romania $3.28 million for the debt. Although it was an irresponsible sale of the debt, the
Romanian government recognized that it could recover more of its losses by accepting Donegal’s
deal. As soon as Donegal acquired the debt, it pulled out of the debt level renegotiations and
began filing legal proceedings against Zambia for the full amount of the debt plus further interest
and other costs, a total of over $40 million. The case coincided with Zambia being on the verge
of receiving multilateral debt relief from the World Bank, IMF, and African Development Fund.
The UK Royal Court of Justice in London ruled in Donegal’s favor but limited the
amount the vulture fund could claim. Still, it ordered Zambia to pay Donegal $15.4 million plus
yet-to-be-determined legal costs.14 This amounts to over a third of the money that Zambia was
due to save this year as a result of debt relief (it usually makes $40 million worth of payments
annually on its debt). The money was intended for domestic spending on education and
healthcare. Donegal is currently trying to claim corruption funds that the Zambian government
recently won from its former president. Questions remain as to whether Donegal’s head, Michael
Sheehan, bribed the former Zambian president in order to have the debt recognized by the
Zambian government.15 The U.S. Judiciary is currently building a case against Sheehan under the
Foreign Corrupt Practices Act. Sheehan made a payment to the former Zambian president
Frederick Chiluba’s favorite charity during the debt takeover process. It is alleged that the
payment constituted a bribe and resulted in Zambia easing the debt deal and acknowledging the
14 Jubilee USA Network. “Never Again.” Drop the Debt. Summer 2007.15 Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
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new debt contract with Donegal. In this case, it appears as though national laws might have
enough reach to convict Sheehan. But for cases where bribery does not occur, where bribery is
less evident, or where investors are not U.S. citizens, the Foreign Corrupt Practices Act falls
short. Economic activity seems to occur unbounded with electronic payments, sovereign debt
markets, and transnational operations while political oversight is inhibited by weak international
laws and porous international borders. Although Donegal is a subsidiary of Washington DC-
based Debt Advisory International, it itself is registered in the British Virgin Islands. This leaves
open the question of jurisdiction. Like in the Singer example, political connections also come
into play: “Debt Advisory International are very generous to their lobbyists in Washington. They
have been paying $240,000 a year to the lobby firm Greenberg Traurig - although recently they
jumped ship to another firm after Greenberg Traurig's top lobbyist was put in jail.”16 This case
study draws into question the international financial system, illustrating the corruption,
inconsistencies, and injustice it entails.
Vulture funds are a direct product of the system that they exist in. The global economy
allows debts to be traded like commodities. The global capitalist ideology emphasizes the pursuit
of profit. The international legal system allows debts to be claimed in national courts. These
courts have pseudo-international jurisdiction in that they are only able to evaluate debt contracts
on a case by case basis, not taking into account other non-litigating creditors of a country. The
legal effect of their rulings, however, has full international force. Therefore, multinational
investors – who can also benefit from tax and jurisdiction loopholes – will purchase developing
country debt that is about to be renegotiated (an undervalued commodity) and sue for the full
amount of the debt in international courts. The vulture funds bypass other creditors with equal
claims against a country and often benefit from non-litigating creditors’ debt relief. This includes
16 Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
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debt relief from the World Bank and IMF. In the Zambia case, Sheehan simply fulfilled the role
the global economy created. Most investors’ moral sensibilities fill in the gaps that the
international legal framework leaves. Vulture investors, however, either disregard such
sensibilities or place greater emphasis on legal technicalities and credit enforcement principles
than they do on the alleviation of human suffering and global inequality.
Policy Options
Until recently, there has been little action to deal with vulture funds. At the state level,
courts in countries like the United States and Britain continue to enforce debt obligations to
vulture funds. Legislative steps in these countries are slowly been undertaken to deal with
vulture funds. At the international level, the Bush administration is putting pressure on other
states to maintain the status quo. The policies of the World Bank and IMF are very much affected
by this U.S. influence. There is concern about not wanting to turn back the perceived progress
made by the advancement of economic globalization. Also, with campaign funding for
Republicans coming from vulture fund sources, issues of conflict of interest also come into play.
Increasingly, however, non-governmental organizations are mobilizing to deal with vulture
funds. Jubilee Debt Campaign in the U.K., Jubilee USA Network in the States, and other debt
relief organizations across the globe are coordinating efforts to pressure their respective
governments and the international financial institutions into taking action. It is important to
remember that international debt relief measures such as the HIPC Initiative have no legal force
in individual countries unless they are passed into law by that country.17 Largely, such initiatives
function as regulatory guidelines and international cooperation and pressure are necessary in
order to have them enforced.
17 Gueye, Coumba Fall. Vaugeois, Michael. Martin, Michael. Johnson, Alison. “Negotiating Debt Reduction in the HIPC Initiative and Beyond.” Publication 11. Debt Relief International Limited. 2007.
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A memo produced by a coalition of debt relief activist organizations outlines some of the
main strategies that are being considered.18 With regard to action in the United States, one
approach would try to prevent the enforcement of debt contracts in U.S. courts. To do this,
legislation could be passed in Congress that declares the debts unenforceable. Comity might be
given as a justification for such a law. Lee C. Bucheit explains that, “… comity is premised on
the belief that foreign governmental actions… are entitled to deference in an American court of
law if those actions are consistent with U.S. law and policy.”19 Bucheit is currently a lawyer at
Cleary Gottlieb Steen and Hamilton, a law firm that has represented debtor countries in cases
brought by vulture funds. If Congress can be persuaded that vulture fund lawsuits undermine the
sovereignty of foreign nations, then such legislation would make vulture fund lawsuits
unenforceable in U.S. courts. Another justification could be made that the debts are odious and
therefore should not be enforceable. The odious debt doctrine states that debts incurred during a
corrupt regime and that were not used for the benefit of the people in whose name the debt was
undertaken are illegitimate; payments should not fall to the generations that follow. With either
justification, however, the feasibility of such a law is low. Many members of Congress would be
hesitant to interfere with the judicial system. Furthermore, many share the premise of the Bush
administration that limiting vulture fund lawsuits might undermine the validity of commercial
markets. If such a law were to pass, it would not work retroactively and would only apply to
future vulture fund cases. This approach highlights the interaction between national and
international law, showing how neither is fully capable of dealing with vulture funds.
Another U.S.-based approach would entail the U.S. forcibly purchasing the debts from
the vulture funds through eminent domain and then writing them off. This would constitute a
18 Weissman, Rob. “Legal/Policy Options to Address Vulture Funds.” Vulture Fund Memo. 2007.19 Bucheit, Lee C. “Act of State and Comity: Recent Developments.” Judicial Enforcement of International Debt Obligations. 1987.
19
form of debt relief. To ensure that the vulture funds are not paid their unnecessarily high claims,
the U.S. would forcibly purchase the debt at a set interest rate, eliminating the various penalties
that vulture funds include in their lawsuits. This would mean paying the vulture funds the
original amount that they purchased the debt for plus a standard interest rate for each year they
held it. This approach allows the state actor to temporarily assume control of the international
financial instruments within the state in order to clean up the backlog mess that the gaps of
economic globalization created. It does not solve the root of the problem but rather acts as a
temporary relief for the current manifestations of the problem. Also in line with temporary
solutions, the creation of a “rapid response legal technical assistance facility” would give
developing countries the swift and experienced legal counsel they need when faced with a
vulture fund lawsuit.20 This seems like a pragmatic and achievable aim until a comprehensive
solution can be found.
Conclusion
A final proposed solution in the memo gets at the heart of the issue. It calls for the
establishment of a comprehensive debt workout system that brings international laws and
regulations up to speed with the current economic conditions. It calls for debts to be evaluated in
the context in which they were undertaken, evaluating their fairness and legitimacy. In this way,
the approach brings accountability to the lender as well as to the borrower. The main mechanism
of such a comprehensive framework would be the inclusion of a pari passu clause. This Latin
phrase meaning “with equal step” or “at an equal rate”21 ensures that all creditors to a country are
treated equally in debt renegotiations. This means that a litigating creditor cannot amass the
benefits that another creditor grants in debt relief. Instead of a case-by-case review, the debt of a
20 Weissman, Rob. “Legal/Policy Options to Address Vulture Funds.” Vulture Fund Memo. 200721 Merriam-Webster Online Dictionary. <www.m-w.com>.
20
country would be analyzed holistically to ensure that all lenders lower their debt claims equally.
Unfortunately, after more than a decade of debt campaigning, such a solution is yet to become a
reality. Without it, economic globalization will continue to run rampant while political
globalization struggles to catch up in piece-by-piece legal solutions. If the vulture fund industry
is to be shut down, the globalization gap between economic markets and political jurisdiction
needs to be closed. This needs to occur in specifics, such as in the establishment of a
comprehensive debt workout system, and in broader terms so that multinational corporations no
longer maneuver the system at the cost of human welfare.
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When Globalization Fails: Vulture Funds and Sub-Saharan Africa’s
Debt Crisis
UCLA Center for American Politics and Public PolicyPolitical Science M191DC – Spring 2007
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