Reducing the threat of vulture funds

Published: Tue 16 Aug 2022, 4:21 PM

Last updated: Wed 17 Aug 2022, 10:00 AM

In the wake of the Russia-Ukraine war, economists fear a series of crises are on the horizon. Only recently, the World Bank estimated that low- and middle-income economies owe a record $9.3 trillion to foreign creditors. What’s worse, 40 poor countries, and approximately six middle-income countries, are either in debt distress or at high risk of it.

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With the risk of a spate of debt crises rising, senior officials at the World Bank are ramping up their calls for changes in sovereign debt laws so that governments can have more control when crises strike and the threat of vulture funds can be reduced.

What is a vulture fund?

Through proxy shell companies, vulture funds purchase securities from struggling debtors to profit from an eventual restructuring. They achieve this by ‘holding out' against any form of write-down on the debt so that eventually they will be paid out in full.

In the past, vulture funds have succeeded in bringing recovery actions against sovereign governments, throwing developing countries into economic jeopardy by profiting from already fragile economies.

One of the most infamous cases is that of Argentina. Faced with a profound economic crisis in 2001, Argentina defaulted on its $82 billion in sovereign debts. Vulture funds quickly swooped in and bought up much of the country’s debt at a steep discount, before waiting for the economic crisis to pass. As the adage goes ‘patience is a virtue’, and before too long, the waiting game was met with rich rewards when the funds sued Argentina in international courts for repayment of the bonds in full.

‘None of these hedge funds was buying Argentina’s bonds at par,’ said Charles Geisst, a former investment banker and author of Beggar-Thy-Neighbor: A History of Usury and Debt. ‘They bought them at a distressing rate hoping for a bounce.’

And a bounce they did receive. In 2012, a US court ruled Argentina had to repay its debtors at full value to the tune of $4.65 billion — a ruling that came as Argentina faced crushing unemployment rates and skyrocketing levels of poverty.

Why do vulture funds prey on Africa?

As Jean-Roger Kaseki explains, a Human Rights and Social Justice Research Institute Associate: "Most African countries are vulnerable, because they are debtors and owe the IMF, World Bank and other international financial institutions substantial loans. These developing countries, especially African nations, are not protected by any international laws or by the United Nations."

Across Africa, vulture funds have already taken action against several countries such as the Ivory Coast, the Democratic Republic of Congo, and most notably, Nigeria.

Seeking to profit from the Nigerian people, Process and Industrial Developments (P&ID) – a shell company owned by the vulture fund VR Capital and an opaque Cayman Islands-based entity Lismore Capital – are currently pursuing the Federal Republic of Nigeria (FRN) for over $11 billion.

The catastrophe started in early 2010 when the owners of P&ID, Michael Quinn, and Brendan Cahill, entered into a 20-year agreement with the government of Nigeria to build a state-of-the-art gas processing plant – the output of which was to be used to power Nigeria’s national electric grid. However, two years after the initial contract was signed, the agreement collapsed. P&ID took the dispute to arbitration in London, and in 2017 won a $6.6 billion arbitration award, with around $1 million in interest payable each day Nigeria failed to meet their obligations.

If enforced, the arbitral award will have a devastating impact on Nigeria – a country where approximately 40 per cent of the population live below the poverty line and only four per cent are enrolled in the National Social Safety Net Project (NASSP). Indeed, the eyewatering arbitral award is equivalent to roughly one-fifth of Nigeria’s foreign reserves and almost 2.5 per cent of its annual gross domestic product. Nonetheless, despite the cataclysmic consequences of enforcing the award, P&ID and its vulture fund backers continue to pursue the Federal Republic of Nigeria aggressively.

Fortunately, the tide appears to be turning against P&ID. In 2020, Nigeria scored a significant victory when a London judge ruled against P&ID, finding the government had established a ‘strong prima facie case of fraud’. As a result, Nigeria was granted permission to appeal the arbitral award in a trial scheduled for January 2023, with the country now offered the chance to clamp down on vulture funds and put a stop to their spurious tactics.

It is clear greater legislation and legal assistance to poor countries is required to ensure developing countries remain protected from vulture funds. Only by tackling the issue head-on and putting an end to these ‘so-called’ investors can developing countries continue to grow their economies and work to end poverty.

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