Case study: ZambiaIt's completely legal, but profoundly unjust. Here we answer the basic questions about Donegal International's lawsuit against Zambia, and why Zambia shouldn't have to pay. Where did the debt come from?
In 1979, Zambia was given credit of $15 million by Romania towards agricultural machinery and vehicles (not all of which arrived in usable condition). By the 1990s, because of crushing poverty, it was unable to repay its external debts and became eligible for the process to qualify for debt relief. It began negotiating with its creditors about partial payment of old, bad debts.
How did Donegal get hold of the debt?
In 1999, as Zambia was trying to negotiate clearing the debt they owed to Romania, Donegal International swooped in and bought up the debt - then valued at around $30 million with accrued interest - for a knockdown price of $3.3 million. Then sued Zambia for the full amount of the debt, plus compound interest, demanding a staggering $55 million in total!
Why didn't Donegal get their full claim?
The judge ruled Donegal's claim of the full worth of the debt was not justified. But in the end he ruled that, legally, they are entitled to something from Zambia, which he judged as being $15.5 million. These rich pickings might be just business to Donegal. But for Zambia, it is money that could train doctors and nurses, pay teachers, and build hospitals.
What did Zambia say about the debt?
Zambia claimed in court that Donegal had got hold of the debt - and an earlier agreement by Zambia to pay - dishonestly, by bribing officials. The judge found that there was not enough evidence of this, but he did state that the businessmen controlling Donegal had been dishonest in court. In the final hearing, he said, "I do regard the dishonesty with which I was confronted as quite serious... it is not what you might call individual fibs popping up in the witness box here and there."
Shouldn't Zambia just pay up?
Zambia is a very poor country, which needs its money to meet the needs of its own people. Eighty percent of Zambians live on less than $1 a day.
Moreover, it is not even as if this is a debt that Zambia incurred towards Donegal: Donegal bought the debt at a vastly reduced price at a time when it knew perfectly well that Zambia was desperately poor and considered so indebted that it had to have debt relief. In fact, Donegal even used this fact in its attempts to persuade Romania to sell it the debt.
Other creditors have, in good faith, cancelled debts that are in some cases much larger. Rich country creditors, including the UK, have agreed to cancel Zambia's debt to them on the understanding that Zambia should then have extra funds available for poverty reduction, rather than extra funds to repay other creditors in full. Zambia had to promise these countries that it wouldn't give better terms to other creditors: Donegal is now forcing Zambia to break this promise by demanding a huge sum that could otherwise go to poverty reduction.
Explore the issues
1. Read more about Zambia's case
2. Get the background on vulture funds
3. Watch the Newsnight reports