Stop debt vultures, demands Brown
Chancellor warns UN of poor countries' risk
Monday May 6, 2002
Gordon Brown will this week demand urgent action to clamp down on vulture funds – financial institutions that buy up the debt of poor countries at knock-down prices and use the courts to extract payment in full with interest.
The chancellor will express concern at a meeting of the United Nations in New York that the activities of vulture funds are putting global debt relief strategy at risk by diverting sorely needed money away from poverty reduction policies and into the coffers of western companies.
Amid signs that the funds are deploying their considerable financial resources to bring test cases against developing countries in courts around the world, Mr Brown believes a number of heavily indebted poor countries - or HIPCs - such as Nicaragua and Ethiopia might decide to pay commercial creditors rather than become embroiled in costly legal battles.
Mr Brown's move is likely to win the support of the World Bank, which in a report last year said: "In some cases, HIPCs have paid commercial creditors in full because of the threat of litigation or to avoid disrupting a commercial relationship. This could endanger the achievement of sustainable debt levels."
Treasury sources said that as yet there was no international plan for tackling the funds, but that one stopgap solution might be for rich nations to provide money and technical assistance to HIPC nations to allow them to fight the legal action effectively.
The activities of vulture funds have come to prominence following the success of Elliott Associates – a New York-based hedge fund - in a legal battle against the government of Peru. Elliott Asso ciates paid $11m (£7.5m) in 1996 on the secondary market to buy $20m of Peru's debt and then sued for full repayment plus capitalised interest.
The US court of appeal ruled in favour of the hedge fund and it received a total of $58m from the impoverished South American country last October - making a profit of $47m.
Mr Brown believes that the actions of vulture funds conflict with attempts by Britain and other industrial nations to reduce the debts of the world's poorest countries to sustainable levels.
Although Peru is not classified as a HIPC nation, it has benefited from the so-called Brady bond scheme, under which the commercial debts of Latin American countries were written down and converted into bonds.
Peru makes two payments of $80m each year on its Brady bonds, but Elliott Associates used its victory in the US courts to argue that it had preferred creditor status and that no payment should be made on any Brady bond unless it was paid in full.
Faced with the threat of defaulting - a move which would have had a disastrous impact on financial market confidence - Lima capitulated. Had the hedge fund opted to collect its debt along with the other Brady bondholders, it would still have made a profit, but of about $10m rather than $47m.
Before travelling to New York this week, Mr Brown will defend the increase in borrowing in the Budget at a meeting of Europe Union finance ministers.
The chancellor's spending plans have been criticised by the European commission for failing to comply with the strict terms of the stability and growth pact, but the Treasury said Mr Brown had no intention of backing down.