8 September 2016 by Tiago Stichelmans
CC - Flickr - Amir Farshad Ebrahimi
At its upcoming session on 20 September, the UN Human Rights Council will discuss a new report, coordinated by Jean Zielger, on the harmful activities of vulture funds
Vulture fund Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors. and their impact on human rights. This report shows how vulture funds negatively impact human rights and gives recommendations on how the international community, as well as individual countries, should address this situation.
Worried about the activities of vulture funds
Vulture fund Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors. against states in debt crises, and most notably in Argentina, a group of countries requested the Advisory Committee of the UNHRC to prepare a report on the activities of vulture funds and their impact on human rights in a resolution that condemned vulture funds activities.
Vulture funds are uncooperative hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. or private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. funds that buy, on the secondary markets, bonds or loans owed by crisis countries cheaply, at prices far below their nominal value, and then sue for full payment. Undermining attempts to restructure the debt, vulture funds threaten the financial stability of the countries they are attacking, delay the solution of debt crises, and make such a solution more costly.
Some countries have in the past years adopted legislation aimed at stopping vulture fund litigations, most notably Belgium, who adopted the most recent and most comprehensive anti-vulture funds legislation. This legislation is however being attacked in Belgium courts by a vulture fund, NML Capital. In parallel, because of the vulture funds attack against Argentina, in 2015 the G77 started a process at the UN which concluded with the adoption, by a large majority of the UN General Assembly, of Basic Principles on Sovereign Debt Sovereign debt Government debts or debts guaranteed by the government. Restructuring Processes. Vulture fund activities are indeed only made possible by the inexistence of an international sovereign debt restructuring mechanism.
While the economic and financial impact of vulture funds’ activities has been widely analysed, the biggest innovation of this report is the analysis of vulture funds’ impact on human rights. The report stresses that vulture fund claims, by diverting much needed resources, have an impact on governments’ capacity to fulfil their human rights obligations, in particular economic, social and cultural rights. In particular, lengthy litigation can “worsen the already significant economic and financial consequences attached to the crises and lead to policies that have a severe impact on the enjoyment of human rights”.
Litigations themselves, a common feature of vulture funds’ techniques to force repayment, can be financially costly for countries that already lack financial resources. When the country has to repay the vulture fund, if often must cut social budgets. This has a negative impact on human rights but also on the country’s development. The report presents the case of Malawi, which in 2002, sold the maize from its food reserve agency to raise funds to repay loans. 7 million people out of a population of 11 million faced food shortage as a consequence.
Vulture fund activities also threatened the IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.
When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.
As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).
The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
http://imf.org and World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.
It consists of several closely associated institutions, among which :
1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;
2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;
3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.
As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
http://worldbank.org Heavily Indebted Poor Countries Heavily Indebted Poor Countries
HIPC In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.
The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.
Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.
List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia. (HIPC) initiative that provided debt relief to cancel or reduce the debt burden of poor debt-distressed countries. This initiative freed up financial resources for its beneficiaries that were then claimed by vulture funds in many cases. While the initiative was launched to reduce poverty and improve social services in very poor countries, thus improving human rights, it eventually benefited vulture funds instead, as they were able to seize financial resources that the initiative made available.
It is not only developing countries that are under threat from vulture funds, but developed countries as well. Recently, Greece and Puerto Rico were victims of vulture funds. This shows the necessity for the international community to tackle this issue.
The report suggests two ways to protect poor countries affected by vulture funds: First, the adoption of national laws against vulture funds that could, for instance, limit the profits that vulture funds can make through their litigation, which would threaten their business model, and second, the establishment of a mechanism for sovereign debt restructuring that should prioritise human rights obligations over debt servicing. The report concludes that: “A State’s obligation to ensure the enjoyment of at least the minimum core of economic and social rights should take priority over its debt service Debt service The sum of the interests and the amortization of the capital borrowed. obligations, particularly when such payments further limit the country’s ability to fulfil its human rights obligations”.
This UN Human Rights Council report is a welcome step. It must now be seen how the UN will continue its work on this issue.
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