Another reason poor countries stay poor is the vultures.
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The world's economic system is designed so that governments are forced to look outside for money for basics and general long-term development plans. Every now and then, a country will borrow money from another country for these purposes
What happens when a country fails to pay back its debt, and it becomes clear it is about to default? The lender still wants its money, but collecting it is too much trouble, so they call in the vultures, specifically, the vulture funds.
A vulture fund is a private investment company—often registered in a tax haven on some exotic island. The vulture fund searches for and takes over debts owed by struggling governments, i.e. distressed debt.
According to the IMF, the amounts claimed by vulture funds from targeted countries and governments “represent a significant portion of the relevant national gross domestic product (GDP).”
Vulture funds operate by approaching the lender of a country in danger of defaulting or one that has already defaulted, offering to take over the debt, and then seeking to recover the full amount through the court system.
Once a vulture fund takes over the debt, it refuses to entertain any talk of debt restructuring or payment plans. Instead, they claim the repayment of the total debt, i.e. the principal plus any accrued interest and arrears.
In recent decades, vulture funds have averaged recovery rates of about three to twenty times their investment, equivalent to 300% to 2000% returns. One method they use is by seizing assets from the indebted country.
A vulture fund will wear down the indebted country through continuous court cases, a practice called “champerty.” Most African legal systems have never heard of this. This type of litigation is intentionally drawn out, with lawsuits taking between 3 and 10 years.
Most of the debt bought by vulture funds is acquired at 10% of its value. So, if Country A owes $100M to country B, the vultures will pay $10M to Country B and then claim the whole $100M, plus interest and arrears. Vultures often recoup legal fees from indebted countries.
Vulture funds emerged in the 1960s to relieve lending institutions of bad debts. At first, this ‘secondary’ debt market was restricted to consumer accounts like bad credit card debts and personal loans. By the 80s, it expanded to corporate debt, then sovereign (national) debt
Here are a few examples of how vulture funds operate: In 1979, the government of Zambia bought agricultural equipment from Romania on credit. Unfortunately for the Zambians, they soon suffered from low copper prices in the early 80s. Copper was their primary source of income.
The copper price collapse caused a shortage of foreign currency, meaning Zambia struggled to service its foreign debt. In 1984, the Zambian government declared it was stopping the payment of the debt to Romania. Romania sold Zambia's debt to Donegal International, a vulture fund.
Initially, the Zambian government reached a payment agreement with the vulture fund. However, after paying $3.4 million, the government stopped making payments because of suspicious ways the agreement had been reached.
A few months before Zambia was due to receive debt cancellation under the World Bank's 'HIPC Initiative' aimed at relieving poor countries from debt, Donegal sued for US$55 million before a British tribunal and was awarded US$15.5 million—a profit of 530%!
The Zambian government accepted the judgment and set aside 65% of the budget initially reserved for public health programmes to service the debt to the vulture fund.
According to the United Nations Human Rights Council (UNHRC), “vulture funds took away from [Zambia] almost 15 percent of its total social welfare expenditure, funds that could have been channelled instead towards education, healthcare and poverty alleviation.”
In 1995, Paul Singer and his vulture fund, Elliott Management, purchased US$20 million of Peru’s bank debt at about half the original value. Elliott sued the South American country and was awarded US$56 million by a New York Appeals Court
To secure the money awarded in the judgement, Elliott filed restraining orders blocking Peru from paying other debts. A court in Belgium ruled that “Peru was attempting to make payments in violation of a principle of equal treatment among foreign creditors.”
The Peru/Elliot case set a precedent for vulture funds to become a threat in the sovereign debt market and indebted countries worldwide by effectively outlining steps and strategies that new vulture funds would follow to exploit poor nations.
After the success against Peru, Paul Singer and Elliott Management purchased US$30 million of 1980s debt owed by the Republic of Congo. Elliott sued the country and was awarded more than U$100 million in 2002.
Since its court victory, Elliot's vulture fund has claimed millions from the country’s oil sales because it can seize the Congo's oil profits until the debt is repaid.
So, even though Congo has a lucrative oil industry, the arrangement where Elliot siphons some of the money away means that the country's most profitable industry will continue to be hampered by negative investment judgements and continues to be seen as a risky business partner
In a 2016 report, the UNHRC said vulture funds “acquire the defaulted sovereign debt of poor countries on the secondary market at a price far less than its face value and then attempt, through litigation, seizure of assets or political pressure.”
The UNHRC further noted how vulture funds use not only court proceedings but also “lobbying and other pressure tactics, which can range from attempting to attach the debtor State’s assets to organizing discrediting press campaigns with a view to forcing the Government to pay.”
In 2011, African countries made up over 80% of countries either eligible for debt relief or vying to become eligible under IMF and World Bank initiatives. In 2019, many African countries spent more money servicing their debts than they did on health. Sitting ducks for vultures.
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