Geneva – The world’s attention turned to the practices of vulture funds after the U.S. Supreme Court affirmed a lower court opinion in the NML Capital vs Argentina case, which forbids the country from making payments on its restructured debt.
Argentina had defaulted in 2001 and went through two rounds of negotiations to restructure its debt, both in 2005 and 2010. In June 2014, the court ordered Argentina to pay the ‘vulture funds’ that held out and did not accept the terms of the debt swaps.
The vulture funds had held out with the aim of achieving what amounts to a 1,600 percent return on their original investment. The funds concerned had purchased the Argentinian bonds in 2008 at 48 million dollars and the court ruling ordered Argentina to pay them 832 million dollars.
Nobel laureate Joseph Stiglitz noted that this was “the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so”.
While this case brought the term ‘vulture funds’ into the public sphere, the predatory practices of these entities did not start with Argentina.
According to a former U.N. independent expert on the effects of foreign debt and other related financial obligations of states on the full enjoyment of all human rights, the term ‘vulture funds’ describes “private commercial entities that acquire, either by purchase, assignments or some other form of transaction, defaulted or distressed debts, and sometimes actual court judgments, with the aim of achieving higher returns.”
Basically, vulture funds are hedge funds whose modus operandi focuses on three main steps including: (1) purchasing distressed debt on the secondary market at deep discounts far less than its face value; (2) refusing to participate in restructuring agreements with the indebted state; and (3) pursuing full value of the debt often at face value plus interest, arrears and penalties, including through litigation, seizure of assets or penalties.
Many developing countries have been exposed to the predatory practices of vulture funds, especially African and Latin American countries.
The African Development Bank has reported that at least twenty heavily indebted poor countries have been threatened with or have been subjected to legal actions by commercial creditors and vulture funds since 1999. These countries include Sierra Leone, Cote d’Ivoire, Burkina Faso, as well as Angola, Cameroon, Congo, Democratic Republic of the Congo, Ethiopia, Liberia, Madagascar, Mozambique, Niger, Sao Tome and Principe, Tanzania, and Uganda.
Peru was targeted by NML Capital in the year 2000. According to media reports, the fund spent almost four years in the courts to win a ruling that forced Peru to settle for almost 56 million dollars on distressed debt, which the fund had initially bought for 11.8 million dollars.
The African Development Bank has documented that up until the year 2007, 25 judgments in favour of vulture funds had yielded nearly one billion dollars. Out of this amount, 72 percent of the judgments have been against African countries. The reported number of outstanding cases against debtor countries has doubled since 2004.
According to the World Bank and the International Monetary Fund (IMF), 54 court cases were instituted against 12 heavily indebted poor countries between 1998 and 2008. The IMF estimates that in some cases claims by vulture funds constitute as much as 12 to 13 percent of a country’s gross domestic product. The World Bank estimates that nearly one-third of countries that are eligible for debt relief and other poverty alleviation programmes are the targets of nearly 26 vulture funds.
Concerned about the extent of the threat posed by such predatory practices and their systemic implications, several international authorities and multilateral institutions have voiced their concern about the matter.
The African Development Bank has warned that by precluding debt relief and costing millions in legal expenses, these vulture funds undermine the development of the most vulnerable African countries.
In June 2014, the heads of state and government of the Group of 77 and China, in their declaration issued on the occasion of the ‘For a New World Order for Living Well’ summit held in Santa Cruz de la Sierra, Bolivia, reiterated the importance of “not allowing vulture funds to paralyse the debt restructuring efforts of developing countries” and stressed that “these funds should not supersede the state’s right to protect its people under international law.”
The IMF had cautioned that upholding the decision against Argentina would harm future sovereign debt restructuring attempts. In 2013, the IMF stated that “if upheld, [the Court of Appeals decision] would likely give hold-out creditors greater leverage and make the debt restructuring process more complicated”.
In 2007, G8 finance ministers had expressed concern about actions of some litigating creditors against heavily indebted poor countries, and agreed to work together to identify measures to tackle this problem based on the work of the Paris Club.
In September 2014, a resolution on the activities of vulture funds and the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social and cultural rights, was presented by Argentina and adopted at the 27th session of the U.N. Human Rights Council which took place in Geneva.
It is also worth noting that the 26th session of the Human Rights Council in June 2014 had adopted a resolution titled ‘Elaboration of an international legally binding instrument on Transnational Corporations and Other Business Enterprises with Respect to Human Rights’.
This resolution sets in place a process of negotiations towards an international legally binding instrument on transnational corporations and their liability in the area of human rights.