The vultures that prey on the poorest

Britain is, at last, clipping the wings of the hedge funds that pick the bones of the world's weakest countries. Simon Evans reports

Sunday 23 October 2011 07:49

Gordon Brown has called them perverse and immoral. Collectively, they have won court judgments against developing countries worth more than £1bn. But, at last, it seems that many so-called vulture funds may have flown for the last time.

Vulture hedge funds make their money from buying up poor countries' debt on the cheap, sometimes for pennies in the pound or cents on the dollar, and then go to court to win repayment of the full original debt plus the interest accrued following non-payment. It is an industry with few friends in the developing world but plenty in the corridors of Wall Street and the City.

The British Government finally put forward proposals last week that, if passed into law, will in effect bring an end to the vultures' predatory targeting of indebted countries.

The proposed legislation will see the capping of court awards to vultures suing countries that qualify for debt relief – the arena in which the hedge funds usually ply their trade.

Awards to funds are likely to be just 10 per cent of what could be expected under existing laws. However, the reduction will only apply to countries under the auspices of the IMF and World Bank-backed Heavily Indebted Poor Countries Initiative, leaving vultures free to pursue developing states such a Bangladesh and Ecuador, which fall outside the scheme.

Maxine Waters, a Democratic Congresswoman, tabled similar legislation in America earlier in the year that will in effect bring an end to vultures seeking restitution in US courts too.

"If both the moves in America and Great Britain become law, then the courts will in effect be shut to vulture profiteering," says Tammi Gaw, the in-house counsel at Washington-based TransAfrica Forum, a human rights organisation. "But I tend to think of these vultures as being like Medusa, so I fully expect them to try to pursue alternative avenues to continue their business. But it will be difficult."

Moves in the UK are likely to have more of an impact than those tabled in America, says Gaw. Many of the shadowy vultures, who are notoriously media shy, are based in places like the Cayman Islands and the British Virgin Isles and typically seek court rulings in the UK on the litigation they pursue.

Nick Dearden, the director of Jubilee Debt Campaign, a charity that has long fought against vultures, says: "Traditionally, the US and UK courts have been pro-creditor so the proposed capping of awards in these countries is very important. But these are proposals and the hedge-fund industry is likely to lobby hard against them so the war isn't over yet.

"The British Government is terrified of sending what it perceives to be the wrong signal to the financial markets by frightening off companies from the City. We'll be interested to hear what the hedge fund industry has to say."

The executives of vulture funds have certainly shown themselves to be an influential bunch in the past, especially in the US. Take Paul Singer, founder of Debt Advisory International (DAI), one of the most active players in the vulture market in the past 20 years. Singer's firm paid $11m for Peruvian debt in the secondary market in 1996, eventually successfully suing the South American's country's government for $58m.

In the 1990s Singer gave millions in political donations to George Bush senior, and later pledged to raise as much as $15m for the Republican presidential campaign of Rudy Giuliani, the former New York Mayor – a move scuppered when the nature of DAI's business hit the headlines.

"When details of Congresswoman Waters's proposals came out in the US, vultures like Kensington came out with full page ads in newspapers criticising the moves," says Dearden. "They aren't going to go down without a fight."

Kensington International is a subsidiary of Manhattan-based Elliot Associates, one of the most active hedge-fund vultures in the world. It has scooped millions suing countries such as the Republic of Congo in British courts.

Perhaps the highest profile vulture case to reach a British court in recent times was the successful suing by Donegal, a British Virgin Islands-based vulture part-owned by DAI, which won a ruling that saw it reap £15m from the Zambian government, on debt the fund bought for £4m. The original debt was created in 1979 when the Romanian government lent the Zambians money to buy tractors.

While the weight of public opinion is against the vultures, funds such as Donegal and Elliot claim they provide a vital check on the moral hazard of debt default from countries that borrow too much and can't pay it back.

One hedge fund manager, who declined to be named, said: "If I borrow too much, or a company borrows too much, and can't pay its debts then there is a consequence. Sovereigns have to be held to account in the same way else the law of the court is replaced by the law of the jungle."

The Alternative Investment Management Association, a trade body for the hedge fund industry, declined to comment.

TransAfrica Forum's Gaw says the picture painted by vulture supporters is too simplistic. "On paper their argument is valid," she says. "But they aren't comparing apples with apples. There is no real capacity for a sovereign bankruptcy. There is no orderly list of creditors lining up as with a corporate insolvency. It just doesn't work that way. Look, nobody wants to see sovereign defaults. We want to see countries successfully working in the secondary debt markets. But the actions of vultures is harmful."

According to the European Network on Debt and Development, a body representing 59 non-governmental organisations from 18 European countries working on issues related to debt, six commercial creditor lawsuits against heavily indebted countries are playing out in court at present, with another two cases in arbitration.

Of the $1.6bn claimed in recent cases by vultures and other commercial litigants suing poor countries, some $994.8m has been awarded to creditors. Countries in which the litigation has been heard include France, Russia, Guyana, US, Britain, Sierra Leone, Switzerland, Uganda and Norway. However, creditors have comfortably reaped their biggest gains in US and UK courts.

"The creditor-friendly countries have always been seen as the US and UK, as well as France and Belgium," says Gaw. "That's no longer the case in Belgium, which moved a while back to curb vultures."

Why it has taken Britain and America so long to introduce measures to stop vulture practices is a mystery to many given the condemnation from the global political elite for more than a decade. But some think there is a simple explanation. "It's pretty straightforward why they have moved now," says Gaw. "I'm not being conspiratorial but the world of banking and finance has imploded. Political campaign finance largely came from Wall Street, the banks and hedge funds, but they have a lot less cash now, so their control over politicians has waned. Governments have taken the opportunity to move against vultures in the wake of the economic turmoil."

At least that's one area where they are proving effective.

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