Why we need to counter the threat from vulture funds
Below is a speech by the Permanent Representative of Argentina at a meeting in the South Centre in September 2014, explaining why international actions are needed to counter the activities of vulture funds which prey on indebted developing countries.
By Alberto Pedro D’Alotto
I would like to thank the South Centre for organizing this discussion session. I also want to thank the presence of all of you today, since for Argentina the issue of the consequences of foreign debt, and in particular of vulture funds, on human rights is of high importance.
The main objective of this discussion is to share views on the issues pertaining to the effects of foreign debt and other related international financial obligations of States on the full enjoyment of human rights, particularly economic, social and cultural rights, with a focus on the activities of vulture funds.
The independent expert on the effects of foreign debt on human rights, Cephas Lumina, has defined the term “vulture funds” to describe private commercial entities that acquire, either by purchase, assignment or some other form of transaction, defaulted or distressed debts, and sometimes actual court judgments, with the aim of achieving a high return. In the sovereign debt context, vulture funds usually acquire the defaulted sovereign debt of developing countries on the secondary market at a price far less than its face value and then attempt, through litigation, seizure of assets or political pressure, to seek repayment of the full face value of the debt together with interest, penalties and legal fees.
To sum up, the vulture funds’ modus operandi is simple: they purchase distressed debt at deep discounts, refuse to participate in restructuring, and pursue full value of the debt often at face value plus interest, arrears and penalties through litigation, if necessary.
It is interesting to mention that one of the first political leaders that used this term was former Prime Minister of the United Kingdom Gordon Brown who stated before the General Assembly of the United Nations in 2002 that ”We particularly condemn the perversity where Vulture Funds purchase debt at a reduced price and make a profit from suing the debtor country to recover the full amount owed – a morally outrageous outcome. The international community should consider giving technical assistance to any HIPC country being sued by a Vulture Fund and provide them with expert financial advice on debt restructuring to prevent future legal claims.
Whenever a country has to defend a legal case it has to divert considerable time, attention and resources away from focusing on poverty reduction, health and education and we must do everything we can to stop this shameful practice”.
Martin Wolf from the Financial Times has said that the term “vultures” seem unfair to the birds: Vultures perform a valuable task while hold outs do not recycle carrion but insist the carcass can meet its obligations.
As is of public knowledge, in a recent decision, the U.S. Supreme Court denied cert. on a petition filed by Argentina in the case initiated by the vulture fund NML that had acquired Argentine sovereign debt bonds after the 2002 default and had not accepted the terms of the agreement reached with over 92% of the bondholders in 2005 and 2010. Thus, it interprets the standard pari passu clause (equality of rank and treatment) as forbidding Argentina from making payments on its restructured debt if at the same time it does not pay the bondholders who did not accept the terms of the agreement, and aim to achieve a 1600% return on their original investment.
In 2010 there were already more than fifty claims of this sort against highly indebted countries, and many of them are still pending. According to the World Bank and IMF, 54 court cases were instituted against 12 Heavily Indebted Poor Countries (HIPC) between 1998 and 2008. The Report of the Independent Expert studies, in particular, the cases of Liberia, Democratic Republic of Congo and Zambia.
Commercial creditor litigation is not confined to Heavily Indebted Countries: according to a study by the Trade Association for the Emerging Markets (EMTA), at least nine non- Heavily Indebted Countries have been the subject of such litigation.
All this evidence clearly shows that the recent conflict between Argentina and vulture funds is not a new problem of the international financial system and that certainly, Argentina is not the first case. This is why we must not understand it as an isolated case, but rather as the expression of a global problem: a broader case about the conflict between a few bondholders, the vulture funds, who rely on predatory practices furnished by the financial system, and the ability of States to reach agreements with the majority of their sovereign debt holders and guarantee the economic, social and cultural rights of their people.
Because we believe that this is a global problem, with potential systemic consequences, that can affect any country, but specially developing countries, we promoted together with the G77 and China a resolution in the General Assembly of the United Nations in New York last 9th of September about a multilateral legal framework for sovereign debt restructuring processes.
Resolution in the General Assembly
On 9 September 2014, the General Assembly adopted Resolution 68/304 titled “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”, that was presented by the Group of 77 + China, and was adopted by 124 votes in favour, 11 negative and 41 abstentions.
This Resolution decided to elaborate and adopt, as a matter of priority during the General Assembly’s sixty-ninth session, a multilateral legal framework for sovereign debt restructuring processes, that will allow to establish effective and transparent rules to achieve orderly and predictable restructuring of sovereign debt. Until now, the lack of a regulatory framework has evidenced that there is direct correlation between poverty, disease, illiteracy and insecurity faced and countries historically crushed by external debt.
The voting scheme on the adoption of this Resolution has also showed the far-reaching agreement of the countries in the developing world, as a true reflection of the importance and urgency that a clear majority of the world’s nations assign to a reality that finds us unprotected against the use and abuse that speculators make of the existing regulatory gap in the current financial system, in matters pertaining to the restructuring of sovereign debt.
Resolution in the HRC
As probably most of you know, we are promoting, together with a group of countries, a Resolution in the present Session of the HRC on 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: the activities of vulture funds”.
The issue of foreign debt and its effects on the enjoyment of human rights has been on the agenda of various United Nations human rights bodies for more than two decades. Since the 1990s, the Commission on Human Rights and, subsequently, the Human Rights Council, have, in a number of resolutions and decisions, adverted to the challenges that excessive foreign debt burdens and economic reform policies pose for the realization of human rights. Apart from several resolutions, the HRC endorsed the Guiding principles on foreign debt and human rights (A/HRC/20/23) by Resolution 20/10.
The debt burden complicates the numerous problems that developing countries face, reduces fiscal capacity, contributes to extreme poverty and is an obstacle to sustainable human development, and is thus a serious impediment to the realization of all human rights, particularly economic, social and cultural rights.
The concluding observations of the various treaty bodies on country reports submitted to them, also indicate that high external debt burdens and dependency on foreign assistance can constitute obstacles to efforts by States parties to comply with their human rights treaty obligations, particularly those relating to economic, social and cultural rights.
To illustrate the effects of such activities, the IMF, for example reports that in some cases the claims by vulture funds constitute as much as 12 to 13 percent of a country’s gross domestic product (GDP). That means that vulture fund litigation oblige indebted countries from using resources freed up by debt relief for their own development programs, thereby undermining the capacity of governments to guarantee the full enjoyment of human rights of their populations.
In relation to the content of the Resolution titled 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: the activities of vulture funds”, that as I said we are presenting for its adoption during this HRC session, it builds on adopted language by the Human Rights Council, updating it (mainly Resolution 25/16, 23/11 and 20/10, in Reports of the Independent Expert on Foreign Debt, on the Guiding Principles on Foreign Debt and Human Rights and on the Guiding Principles of Human Rights and Business).
The Resolution condemns the activities of vulture funds for the direct negative effect that the debt repayment to the aforementioned funds, under abusive conditions, has on the capacity of governments to fulfill their human rights obligations, particularly economic, social and cultural rights and the right to development.
It also picks up language from the recent UNGA Resolution, in the sense that it urges States to participate in the negotiations aimed at establishing a legal regulatory framework for the sovereign debt restructuring processes, and calls upon States participating in the negotiations to ensure that such a legal regulatory framework will be compatible with existing international human rights obligations and standards.
Due to the recent and intensified pressure of vulture funds on developing countries, the Advisory Committee of the Human Rights Council, during its 13th session in August 2014, proposed the HRC to consider a research proposal on the activities of vulture funds and human rights. In that sense, the Resolution requests the Advisory Committee to prepare a research-based report on the activities of vulture funds and the impact on human rights, and to present a progress report to the Human Rights Council at its 31st Session.
Conclusion
The main drive of these initiatives I have just explained has been not only to put in evidence of the global nature of the problem, but also the threat that the activities of vulture funds represent for all countries, particularly to developing countries.
These initiatives evidence, also, the will of the international community to breach the existing gap in a multilateral effort, where sovereign States decide not to be held hostage by the market nor their sovereign debt restructurings left to the discretionary will of speculators.
Alberto Pedro D’Alotto is the Permanent Representative of Argentina to the United Nations and the WTO in Geneva.
