A British court recently ruled that Donegal International, a “vulture fund” that makes short and long-term investments for huge profits, has the right to profit from its purchase of millions of dollars worth of Zambia’s debt – acquired for a tiny fraction of its face value eight years ago. This bizarre legal and financial tangle is a clear example of global profiteering at its worst.
The company’s suit against the government of Zambia demanded more than $50 million for debt that it purchased from Romania at $3.3 million in 1999, when it was already clear that creditors would be forced to cancel a substantial portion of Zambia’s debt because of international pressure. In 2005, when the Group of Eight (G8) industrialized nations agreed to cancel the debts of some of the poorest countries in the world at their summit in Gleneagles, Scotland, Donegal International took action. The vulture fund, which is officially located in the British Virgin Islands but mostly owned by Debt Advisory International, a secretive firm based in Washington DC, filed a lawsuit against the government of Zambia.
Step in Right Direction
Debt campaigners around the world agree that the 2005 debt cancellation agreement is far from perfect. Its most serious flaw is that it only earmarks countries for debt cancellation after they have complied with intense macroeconomic policy conditions, conditions that the World Bank itself has termed a failure in at least three separate reports. But despite its flaws, the current round of debt cancellation offers countries such as Zambia two kinds of freedom: freedom from the undue influence of creditors that occurs when one is completely dependant on the flow of foreign loans to repay older loans, and freedom to spend national budgets on things like healthcare, education and basic infrastructure needs instead of debt servicing. This is still far from the kind of justice that many of us would like to see, but it is at least a step in the right direction.
Enter Donegal International. Vulture funds by definition make their money by investing in failing economies, and in this case they saw their opportunity to invest in Zambia’s unpayable debt. By suing for $50 million, they are announcing their intention to see that they get a cut of the nearly $2.7 billion in Zambia’s debts that are scheduled to be cancelled. If they get their way, the money that Zambia saved in 2006 from not having to repay debts will go directly to their wealthy shareholders.
Not the First Time
The two best known cases of vulture funds attempting to sue governments are both in Latin America, and both involve the same person: Kenneth Dart, heir to the Dart Container fortune. While Kenneth Dart’s father made his fortune by patenting the technology used to make Styrofoam cups, the younger Dart has been involved in shady investing to make his fortune. Aside from the rush to make money out of the fall of communism and the rise of privatization in Russia, two of Dart’s money-making schemes involved using his vulture fund to buy up debt from Brazil and Argentina, and then attempt to cash in on them when debt rescheduling on defaulted bonds and debt was agreed upon. In the case of Brazil, Dart paid about $375 million for debt bonds that he later cashed in on to the tune of $980 million, a 161% profit. That deal was reached without recourse to the courts, but when Argentina refused to give Dart such a deal on bonds that it bought during Argentina’s economic crisis of 2002, judges awarded Dart’s company some $740 million. The government of Argentina has yet to pay this amount, though it is not clear that they will have any other option.
Damned If You…
The Donegal case in Zambia shows just how skewed the current financial system is towards the interests of the wealthy. Before reaching a debt cancellation agreement, an impoverished country must borrow from the international financial institutions in order to repay wealthy creditors and those same financial institutions. Dependence on aid money means that the terms of lending are set completely at the whims of the creditors, who set conditions not just on the how the money they lend is to be spent, but on the nature of the county’s economy itself. Not surprisingly, the country’s economy is shaped by these conditions to benefit international investors who make money from deregulated financial markets, transnational corporations who make money from privatization policies and buyers of commodities, who make money from trade liberalization. All these policies, which further enrich these elites in Europe and North America, further impoverish the country in question and condemn it to a never-ending cycle of debt.
Pennies on the Dollar
When debt cancellation is on the table, vulture funds buy up debts at pennies on the dollar. Technically, the debt is now the responsibility of the fund in question and is therefore not eligible to be part of the debt cancellation, which is an agreement between the country and the World Bank, International Monetary Fund (IMF) or a regional institution such as the African Development Bank. After debt cancellation, the government can expect to be sued for the full value of the debt that it sold, even though the litigious investors acquired this debt at a heavily discounted rate. The company gets money for nothing and the country’s citizens, who would build hospitals, schools, and maybe even factories if they had the money, have nowhere to turn to for justice. Often when countries cannot or will not pay, vulture funds are given valuable privatization contracts, like a bill collector seizing the property of someone who can no longer make the minimum payment on a credit card.
In the long run, meaningful alternatives to this exploitative status quo involve deepening the debt cancellation agreements. Options that have not been on the table, such as governments openly refusing to pay such outrageous claims (and not being punished by the international community) and Northern governments agreeing to pay reparations for the damage that their exploitative lending practices have caused impoverished countries, must be considered and implemented. But short-term solutions rely on increased international regulation of speculative investments of all kinds, including vulture funds. At the heart of these developments in Zambia lies a question: should the “globalized” international economy pamper super-rich private investors or should it protect impoverished countries and their citizens? Vulture funds show us that today, the answer is the former. If we want to move toward a more humane system, we need more international agreements, investment standards and enforcement to ensure that companies like Donegal and Debt Advisory International don’t literally get away with murder.