Vulture Funds Bill - Q&A

The Debt Relief (Developing Countries) Bill is a Private Members Bill introduced by Andrew Gwynne MP. This Q&A has been produced by his office.

What will the Bill do?

• Apply to existing debts of the 40 Heavily Indebted Poor Countries (HIPCs) which are eligible for relief under the internationally-agreed HIPC Initiative;
• Prevent creditors holding these debts from recovering in excess of the rate of relief expected from all creditors under the Initiative; and
• Provide an incentive for debtors to co-operate in settling these debts on terms consistent with the Initiative.

Why is a change in the law needed?

The HIPC Initiative for debt relief expects all creditors to provide an equal reduction in their debts so that the debts of the countries affected are lowered to sustainable levels. Debt relief for these countries is both vital for addressing their development needs, and an economic necessity given their limited prospects for repaying the full amount owed. Most commercial creditors participate and provide reductions comparable to that expected under the HIPC Initiative. This is helped by initiatives such as the World Bank’s Debt Reduction Facility (part-funded by the UK Government), which negotiates voluntary buy-backs from commercial creditors at these reduced rates. But a few creditors instead choose to litigate for full repayment, free-riding on the relief provided by others and diverting the benefits of the debt relief provided by UK taxpayers amongst others away from reducing poverty and towards excess repayment of investors. A change in the law could tackle this.

Why is it restricted to Heavily Indebted Poor Countries?

International agreement to provide debt relief for the HIPCs provides a strong framework for the Bill. Within the HIPC Initiative, the World Bank and IMF’s leadership in assessing the level of reduction required from all creditors to return debts to a sustainable level is a firm foundation for legislation. The UK voluntarily goes beyond this and provides complete cancellation of HIPCs’ debts, and debt relief for more countries, but we shouldn’t oblige commercial creditors to do the same.

Why not include future lending?

Firstly, very few new loans will be eligible for relief under the HIPC Initiative. More widely, if the Bill applied to future lending then the cost of any reduced expectation of recovery would be priced into the loan, increasing the cost of borrowing for the country.

Wouldn’t the Bill damage lending to and secondary markets for emerging economies, or the City’s position as a base for these?

It’s hard to make exact predictions, but I don’t expect a significant negative impact in these areas. The Bill is targeted at a small proportion of emerging market borrowing and specifically excludes new loans. For the debts that it does apply to, their market value is typically around or below the level of recovery to which the creditor would remain entitled. Most commercial creditors already reduce their debts in line with that expected under the HIPC Initiative, either through restructurings such as those conducted by the ‘London Club’ or by participating in buy-backs under the Debt Reduction Facility. The Bill would prevent the minority from going against this. In doing so, and in helping a smooth, fair and orderly restructuring, it’s economically efficient and logical.

Where can I go for more information?

For further background, there’s the HM Treasury consultation:
http://www.hm-treasury.gov.uk/consult_debt_relief.htm
Jubilee Debt Campaign’s website:
http://www.jubileedebtcampaign.org.uk/
and the IMF’s pages on the HIPC Initiative:
http://www.imf.org/external/np/exr/facts/hipc.htm