Vulture funds and governments seek profit from Sudan debt relief

11 December 2018 by Tim Jones

A vulture outside the UK Parliament in 2010, as part of the campaign to get the vulture funds act passed (Jubilee Debt Campaign)

Today (6 dec 2018) the Financial Times has reported that a group of vulture funds have hired lawyer Lee Buchheit to argue for debt relief for Sudan. They hope that if the North African country gets debt relief from governments and multilateral institutions through the Heavily Indebted Poor Countries initiative, it will enable the vulture funds to get a return on their debt.

Much of Sudan’s current debt came from loans in the 1970s and early 1980s when the government was supported by western countries during the Cold War. In 1984 following a set of economic shocks, including a huge drought, Sudan defaulted on the debt to western governments and multilateral institutions, as well as private companies.

Since then, interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. has been added to these loans every year, making them grow massively. The debt to the private sector has grown from $1.6 billion to $8 billion. Western governments have been charging 10-12% interest every year, making the debt owed to them grow from $4 billion to $19 billion.

Sudan has been trying for several years to enter the Heavily Indebted Poor Countries Heavily Indebted Poor Countries
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.
debt relief initiative. If it did it could get much of the debt owed to western governments cancelled. The vulture funds 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.
who own the private debt would then press to get hundreds of millions back on their debt.

The Financial Times has reported the vulture funds could “take as much as a 90 per cent write down” on their claims. However, this would be from $8 billion to $800 million, so only a 50% write down on the original $1.6 billion that was owed. Moreover, the vulture funds probably paid only a few cents on the dollar when they bought the debt, so a 90% write down on the total claimed could still mean huge profits.

In 2010 the UK parliament passed a law which prevents vulture funds suing governments for more than they would have got if they had taken part in the Heavily Indebted Poor Countries debt relief initiative. If the debt is owed under UK law, this probably limits the vulture funds to claiming a maximum of 10% of the debt anyway, so the 90% write down is not out of generosity but enforced by law.

The Western governments are also set to make large amounts if the debt is cancelled. Most of the debt, $15 billion of the $19 billion, is made-up money based on fictitious interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
. However, when they cancel such debt, Western governments count it as ‘aid’. This allows them to count the cancellation as contributing to their aid targets, without spending any money. In the UK’s case, this would allow it to cut aid by $1 billion. For western governments as a whole, $19 billion is 15% of annual development assistance.

So vulture funds and governments are looking to make money out of debt relief for Sudan. What does Sudan get out of it? Because it is not paying the debt, the main benefit is gaining access to new loans. Therefore, for the Sudanese people the key question is how those loans will be spent.

In other similar situations, such as Zimbabwe, local campaigners have called for a public debt audit to discover what the loans were originally spent on, exposing any illegitimate borrowing and lending, in order to create a system to ensure any future loans are well used. Rather than rushing a debt relief process to make money, creditors would be better to ensure a proper investigation of the debt as a way to prevent debt crises from being repeated.

Tim Jones

Jubilee Debt Campaign



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