Vulture funds - where are they operating now?
In 1996, world leaders agreed to an initiative to help heavily indebted poor countries (HIPCs) manage their external debt burdens and reduce them to a level they deemed “sustainable”.
The HIPC scheme is implemented by the World Bank and International Monetary Fund (IMF). In 2005, the international community agreed to a further debt relief scheme, the Multilateral Debt Relief Initiative (MDRI), which cancels the bulk of HIPC countries’ debts to some of the multilateral banks like the World Bank and IMF.
Despite delays and problems associated with it, this debt relief has freed up resources previously tied up in debt repayments and enabled the countries to invest more in tackling poverty instead.
But one of the major problems is that the scheme is voluntary, so a number of creditors have refused to participate. One such group is Vulture Funds. These are companies that buy up poor country debt at a steep discount, in order to sue them for full repayment with costs, thus making massive profits.
It is very difficult to get information about these lawsuits, but from what we know, at least 12 HIPCs have now been subject to or threatened with lawsuits by both vulture funds and original creditors.
Several outstanding cases have been identified by a report published by Debt Relief International in 2007. These include Cameroon, Honduras and Nicaragua.
The annual IMF/World Bank report on HIPC and MDRI, published in September 2008, also lists these countries as well as Ethiopia, Sudan and Uganda, as having cases still to be settled.
Other cases have now been settled - but the vulture funds may still be seeking payment by suing countries’ trading partners. And there may well be more cases that are not documented, for example those countries that have not yet met the criteria to start the HIPC process.
Here we focus on those outstanding cases of HIPC countries, which are reported in the IMF/ World Bank report. All debt figures are from the World Bank’s 2009 Global Development Finance report.
Nicaragua is a developing country with a debt of $3.4 billion. It is the second poorest country in the western hemisphere. Despite improvements in its economic performance in recent years, growth remains slow.
Half the population live in poverty, with a fifth living in extreme poverty - defined by the World Bank as living on less than $1.25 per day. Although official unemployment was reported to be 4.9% in 2007, it is unlikely that this figure reflects reality. 60% of all workers earn a living in the informal sector, where underemployment is high and the data is not clear.
Nicaragua began the debt relief process as the most indebted of the Latin American HIPCs. In 1997 it had an external debt at 177% of Gross Domestic Product (GDP) – the threshold for the scheme is 150%. It began the process in December 2000 and finally met the conditions for debt cancellation in January 2004. It was the tenth country in the world to complete initiative. When the MDRI was agreed, Nicaragua qualified for further multilateral debt relief.
Nicaragua is currently facing legal action in a District Of Columbia District Court in the US by Inex Interexport, a Serbian joint stock company. The company held the original debt for $9.6 million and is seeking $9.3 million. The World Bank/IMF report states that IMT AD based in Belgrade are also involved in legal action.
A Debt Relief International report (2007) states the potential burden of lawsuits in Nicaragua is huge. They suggest that if the lawsuits being faced by Nicaragua were all settled in one year, their cost would be equivalent to over 90% of the value spent annually on health and education. With regard to debt repayments, the statistics are more worrying. They estimate the Nicaragua would spend over 5 times as much on lawsuits as it would on debt repayments.
Honduras is a developing country with a debt of $3.3 billion. It has one of the highest levels of poverty and inequality in the western hemisphere. 59% of Hondurans remain below the poverty line and 36.2% below the extreme poverty line - less than $1.25 per day.
The agricultural sector has declined in the past two decades, largely due to the fall in prices of export crops such as bananas and coffee. Honduras is also susceptible to hurricanes and droughts. In 1998 Hurricane Mitch caused 5,750 deaths and losses amounting to nearly 40% of GDP.
The World Bank has stated that increased public spending on health and education has shown significant results over the past decade. For example chronic malnutrition in children aged 1-5 fell from 33% in 2001 to less than 25% in 2006. It is vital that these improvements continue.
Honduras qualified for HIPC and so got some relief on its debt payments in July 2000 and received further relief on completion of the HIPC process in 2005, and later from MDRI. As a result its debt burden has considerably decreased in the last decade, from 82% of GDP in 1997 to only 17% in 2007.
Honduras is currently facing legal action in a national court by an Argentinean company known as Bagó Laboratories. The Bagó Group is one of the major Argentine organisations with a strong presence in several Latin American countries. The group comprises different companies focused on health care and pharmaceuticals. The debt was bought at $1.5 million and they are seeking the same amount. This amounts to an 8th of Honduras’ annual GDP.
Uganda is a ‘low income’ country; with a current debt is $1.6 billion. Uganda remains one of the poorest countries in the world, with a third of the population living below the poverty line.
In April 1998, Uganda was the first country to benefit from interim debt service relief under the HIPC Initiative. In 2000 it qualified for further debt relief having completed the process. In 2006, Uganda became eligible for MDRI as well. The cancellation of this debt created massive potential for social and economic development of the country. It is vital that the funds remain available to do so.
Uganda is currently being sued by the Iraq Fund for International Development. The debt was originally held for $6 million. The amount being sought is $6.4 million.
Despite more than two thirds of lawsuits being held in US and UK courts, this case is being held in Uganda. Occasionally creditors will sue in the national courts of HIPCs if they feel the system is likely to favour them. It has been suggested that the low pay levels of legal officers, judges and government officials can make it easier to use bribes and threats to convince them to settle out of court or concede suits.
Ethiopia is a ‘low income’ country. Its debt is currently stands at $2.6 billion. 39% of the Ethiopian population lives below the poverty line. Despite being one of the fastest growing non-oil economies in Africa; Ethiopia’s considerable development gains are currently under threat due to the changing fuel and food prices.
Ethiopia qualified for some relief on its debt payments in November 2001 and had some of its debts cancelled outright when they finished the process in April 2004.
Ethiopia is currently involved in two lawsuits with Kintex, based in Bulgaria, and Yugoimport based in Serbia. Both lawsuits are being held in Russia and according to the World Bank/ IMF report, are currently ‘in arbitration’. Arbitration is where a dispute is resolved by an impartial adjudicator whose decision is final and binding. Parties often seek to resolve their disputes through arbitration due to the perceived advantages over judicial proceedings. Some of these are particularly fitting to private companies involved in vulture fund activities. Arbitral proceedings and awards are generally held behind closed doors, and can be made confidential. Furthermore there are very limited avenues for appeal. All of this makes it difficult for the developing country to gain the external support they may need to help in presenting their case. And many campaigners argue that existing arbitration mechanisms are far from ‘impartial’, often favouring creditors not least because they have many more resources and expertise to navigate the process.
Kintex, founded by Bulgaria’s secret police in the 1960s, is one of the oldest and most important arms exporters in Bulgaria. It is responsible for the majority of Bulgaria’s arms exports, and is the primary distributor for most of the country’s small arms and light weapons. A report written by Human Rights Watch (1999) states that Kintex ranks as one of the most notorious arms trading firms in the world. The company has been involved in several questionable arms deals and illicit transactions, some of which have violated binding U.N. embargoes. Kintex originally held the debt for $8.7 million and are seeking the same amount.
Yugoimport is a state owned firm, trading in arms and ammunition. The company held the original debt for $122 million and the amount they are seeking $178 million.
The cost of lawsuits relative to annual expenditure on other services is a cause for concern. A Debt Relief International Report (2007) estimates that Ethiopia could spend twice as much on lawsuits as it would on debt repayments in one year. Additionally, the amount spent on lawsuits is equivalent to a quarter of the amount Ethiopia spends annually on health and education.
Sudan is a developing country with a current debt of $19 billion. The Sudanese economy grew at over 10% in recent years, bolstered by higher oil production, a good harvest and a continuing boom in construction and services. Growth however has now slowed. Estimates for 2009 have recently been lowered by the IMF to 6%. The country is in fact one of 26 countries that the IMF has recently identified as highly vulnerable to the adverse effects of the global economic downturn.
Sudan is currently pre-decision point in this HIPC initiative. This means that although they have been assessed to meet the criteria for the debt relief scheme, they have not yet met the qualifying conditions. A large amount of the country’s national income is therefore still being spent on unpayable debt.
Sudan is currently facing legal action from a company based known as Namco Anstalt which is linked to the Euro management and Trust Company Establishment based in Lichtenstein. The case is being held in Sudan. The debt was bought for $4.6 million and the amount being sought is $5 million.
Cameroon is a developing country with a current debt of $3.2 billion. In the early 1980s Cameroon was one of Africa's economic success stories. However as Cameroon's economy is highly dependent on the goods it exports, swings in world prices strongly affect its growth. In the 1980s sharp declines in coffee, cocoa, and oil prices led to a 60% decline in the terms of trade. This decline was combined with other economic problems which and resulted in a rapid accumulation of debt. In February 2008, public frustration over rising prices was partly to blame for social unrest and violence in many Cameroonian cities.
Cameroon completed the HIPC initiative and qualified for full debt relief in April 2006. This has opened up several new opportunities for the country. Freed up resources have been used to increase spending on health, education, agriculture and infrastructure development. However it still lags behind other comparable economies on social indicators such as life expectancy at birth and secondary school enrollment.
Cameroon is currently facing legal action from Grace Church Capital based in the Cayman Islands and Sconset Ltd and Antwerp who are both based in the British Virgin Islands. Both cases are being held in France, and are currently in arbitration.
Gracechurch Capital bought the original debt for $9.5 million and are currently seeking $39.7 million at a court in France. Sconset bought the original debt for $15.2 million and claimed $67 million at a court in France. Sconset has agreed to arbitration, but is insisting that the principal and legal fees be paid. Antwerp bought the debt for $15.2 million but are claiming $196 million, also at a court in Switzerland. They have agreed to similar terms as Sconset.
A report issued by the African Research Bulletin in 2008 states that creditors have claimed $441.1m from private borrowers in Cameroon, which has so far been ordered to repay $50.9m.
A 2007 study by the organisation Debt Relief International estimates that the potential cost of lawsuits in Cameroon works out at over 5% of the annual amount spent on health and education. The total being sought by the three companies above is over $300 million. As Cameroon only received $425 million in grants in 2007, it is clear that lawsuit costs will hugely reduce the amount available for the country’s development.