Consultation under way for law that will clip wings of vulture funds

12 August 2009

Proposed legislation is supported by the Secretariat’s Legal Debt Clinic

A consultation on legislation which targets commercial creditors that do not take part in internationally agreed debt relief schemes has been launched by the UK Government.

This proposed law would tackle so-called vulture funds, which sue already heavily indebted developing countries for full repayment of any loans they gave as well as costs and fees incurred, in order to make a large profit.

What are vulture funds?

Vulture funds, according to the International Monetary Fund (IMF), are arbitrage-seeking investors who specialise in obtaining debt in the secondary market at prices far below face value. Their goal is to recover the debt, through negotiation or even litigation, at a value greater than the purchase price. Many poor countries, especially in Africa, are considered easy prey for these hedge funds which are estimated to hold more than US$1 billion in claims against the developing world, states the IMF.

“We welcome the decision of the government to have taken the initiative,” said Devi Sookun, the Legal Adviser from the Commonwealth Secretariat’s Legal Debt Clinic. “Their position will send a strong message of support to poor countries suffering at the hands of the corrupt creditors.

“This proposed legislation is effective at condemning any act of profiteering by these creditors without denying their legal human rights.”

The Secretariat’s Legal Debt Clinic has been advocating for a change in legislation by the UK Government since April 2007 when finance ministers from Heavily Indebted Poor Countries (HIPC) met in Washington, DC.

Senior officials from the UK Treasury met with various civil society representatives as well as staff from the Secretariat’s Legal Debt Clinic on 10 August 2009 to discuss the proposal. They will also meet the creditors’ stakeholders, who will offer a different perspective about the legislation.

At the meeting, Ms Sookun stressed that even if the provisions in the legislation were minimalistic, they will have a significant effect at stamping out the profiteering practices conducted by these creditors.

What is HIPC?

HIPC stands for Heavily Indebted Poor Countries. It refers to countries with high amounts of debt and poverty.

She also advised the government to include a provision which would force creditors to negotiate and settle matters outside the courtroom, before formally lodging their cases.

Comments and feedback are invited on the consultation:

http://www.hm-treasury.gov.uk/consult_debt_relief.htm