Staff writer Sean Harvey on the ongoing problem of predatory “vulture funds” taking advantage of in-debt developing countries
A pervasive issue in the web of the global capitalist system is the phenomena of vulture funds, who prey and extortionate financially weak, sovereign states. A vulture fund will swoop in to economically distressed countries and either through lobbying or legal pressure will buy up cheap discounted sovereign debt or assets that are very likely or near to default. They can then, through legal action, claim to be paid the debt repayment and its interest in full.
After the many financial difficulties and debt crises faced by countries in South America particularly, the talons have been sharpened. In 2016, Argentina settled a long running legal case with several vultures after firms bought part of the countries’ defaulted debt for fractions of its value. The firms then sued the Argentinian Congress to claim the full value of the original the loans – some funds able to make returns of up to 950%.
The original $100 billion bond was governed by New York law and the ruling was taken to the US Supreme Court who ruled in favour of the vultures. The Supreme court also rejected the Argentinian Congress’s appeal on the verdict which has further opened the country to other vultures who were holding Argentinian defaulted debt assets. Argentina had opted to not follow International Monetary Fund (IMF) programmes when it originally defaulted in 2001 and this autonomy was coupled with its economy steadily recovering over the 15 years before this settlement.
However, when the country ran into financial trouble around the global financial crisis it was finally forced to settle with the vulture funds. The small number of the predatory creditors were holding out for payments on these loans, and, as a result stopped Argentina negotiating any other kind of debt restructuring. The vultures had refused previous deals with Argentinian government in 2005 (agreed upon by the other 93% of creditors) because it was only 30% of the face value of the bonds. For context these firms had bought them at 20% of their face value
More recently, Cuba has become the victim of vultures. An ongoing case in the British high court has drawn several demonstrations from Cuban nationals in the UK and other anti-capitalist sympathisers. These demonstrations, often happening around the courts in Temple, are voicing anger at this case being settled in UK courts. CRF I Ltd can utilise lobbying power in the UK much in the way firms in the US did against Argentina. The UK introduced a law back in 2010 aiming to restrict Vultures from using UK High Courts to profit in this way. This trial gives an opportunity to test to integrity of this law and furthermore, the UK’s commitment to help developing countries, something already under scrutiny when the Department for International Development was dissolved in 2020.
As a last resort, nations can turn to the IMF, existing at the bottom of the ‘asking for help’ list. This, of course, gives the organisation the power to add terms and caveats to the aid they give out. Their global power has of course enabled them to bail out countries when development plans or investments have failed – continuing with the aim of both sustained global and domestic economic prosperity. But this then does comes with varying degrees of Faustian bargains; from subtle adjustments to rewriting a whole economy. Refusing this deal leaves countries will little other choice and, in the case of Cuba, its ideological distance from the IMF has since made it vulnerable.
In 2009, a hedge fund registered in the Cayman Islands secured several loans originally issued in the 1980s. They were issued by the European banks Istituto Bancario Italiano and Crédit Lyonnais, which no longer exist as of 1991 and 2003 respectively (having been absorbed into larger organisations). These original loans were also written in the now defunct currency of the Deutsche-mark. The firm, CRF I Ltd, is part of the London Club; an informal group of private creditors who have provided debt relief payments on loans to developing countries, first meeting in the 1970s. Now CRF I Ltd have taken the Republic of Cuba and its National Bank to the High Court in the UK, pursuing legal action for this debt repayment. Cuban debt, from this time, amounts to roughly $7 Billion, with CRF I Ltd holding a claim to only $72 million of that. Meaning the outcome of the case could open the country to more legal challenges for further debt repayments.
The UN also passed a resolution in 2015 to redefine debt restructuring programmes to try to prevent predatory behaviour like this happening in the future. However, there still exists estimates of billions of dollars of debt from 20th century development programmes that could be held by anyone. If these resolutions are to be taken seriously then they have to be backed up by tackling the existing claims by Vultures or they may prove to be too little too late.
This trial, filled in 2020, began in the High Court on the 23rd of January this year and is still ongoing. Even without settlements it will cost the Cuban republic millions in legal fees and expenses. Looming over is also the undeniable fact that none of this is the fault of Cuban people, but it will likely be them who bear much of the cost should CRF I Ltd win and force payments from the Cuban government. Whether or not the funds claim is legal it should sharpen the question of who should bear the cost of past economic failure and is it right that anyone should profit from it?
Second year International Development
