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Moving Ideas: Vultures: The Corruption Behind Debt Relief

FOR IMMEDIATE RELEASE
APRIL 3, 2007
9:11 AM

CONTACT: Moving Ideas
Phone: 202-465-3777

 
Vultures: The Corruption Behind Debt Relief
 
Background
Initial reactions to the term debt relief are generally positive. Helping poor countries = good, right? However debt relief is more complicated than just helping poor countries. In simple terms, debt relief is supposed to be the partial or total forgiveness of debt, in this case in developing Countries.

Debt relief however doesn’t seem to be working the way it should. Instead the existence of ‘vulture funds’ has corrupted the practice. Just as the name implies, these organizations are like vultures that wait around for their victims to be weak before picking their remains. These financial organizations are companies that make a profit by buying a debt from a poor country at a cheap price, and then suing the country for the full amount the debt was worth at a later time.  

Current Situation

A recent example of the corruptness of vulture funds is the situation with Donegal International Limited and Zambia. In the 1970’s, Zambia borrowed $15 million from Romania. In 1999 this amount had gone up to $30 million because of interest. Donegal International bought up Zambia’s debt to Romania for a reduced price of $3.3 million. They then sued Zambia for $55 million when they were near eligibility for debt cancellation.

Why Zambia shouldn’t pay

1) They are poor: the money could be put to better use, like going towards basic human needs like health and education that Zambia is in dire need of. The average income per person in Zambia is 60p (less than US$1) a day, and the $15 million could go a long way to help these people.  
2) They were eligible for debt relief:  Because they were eligible for debt cancellation the debt bought by Donegal International was only worth $3 million instead of the $55 million they sued Zambia for.
3) It negates the efforts of creditors: Many rich countries and creditors have cancelled debt with the understanding that Zambia needs the money more than they do in their attempts to combat poverty. However they still have a responsibility to negotiate comparable levels of debt relief, which they can no longer do if forced to pay $15 million as decided by the courts (instead of the full $55) to Donegal International.    

Damage Control

The most active organizations in addressing the debt relief issue are the Jubilee campaign and the HIPC by the World Bank and the IMF.

The Jubilee 2000 was an international coalition movement that over 40 countries were a part of. This movement for the cancellation of debt in third world countries split into the Jubilee USA and Jubilee debt campaign in 2001. Both campaigns are dedicated to the cancellation of debt in countries that need the money to address more important human needs. The Jubilee USA is a collection of religious and community groups dedicated to debt relief with a specific platform.

The HIPC or the Heavily Indebted Poor Countries initiative was set up by the World Bank and the IMF in 1996 in efforts to reduce the debt of poor countries. Conditions for the HIPC are it must be a poor country with an annual income of around $825 per person and a debt of more than one and a half times their annual export earnings, and they must have a good track record with the IMF.  There are currently 11 countries at the pre-decision point, 9 countries at decision point and 20 countries at completion point of the HIPC initiative. Pre-decision point means those countries that have been assessed and meet the economic indebtedness criteria and have the choice to take part in the initiative. Decision point means the countries have a track record of macroeconomic stability and have followed the interim poverty reducing strategy. The amount of debt needed to get to HIPC levels is calculated and conditional debt relief is provided. The completion point means the countries have maintained macroeconomic stability using the supported program and have carried out structural and social reforms, and implemented poverty reducing strategies. These countries received relief irrevocably.

Success stories of the HIPC initiative include the almost 90 percent reduction in debt stocks of the 29 HIPC’s that have reached decision point. The average projected debt service obligations of post-decision point HIPC’s have already been cut in half and are expected to decline even further as they qualify for debt relief. The HIPC initiative has also contributed to the increased poverty reduction expenditure for post-decision point countries.

Arguments against debt relief

Tax payers’ money is going towards the so-called debt relief initiative in the United States, however this money ends up going to the courts addressing vulture fund cases, and to the vulture funds themselves. President Bush has the ability to put an end to this by deeming it illegal for vulture funds to collect money through courts.

Proponents against the HIPC initiative argue that even after debtor countries spend years meeting the harsh conditions set by rich countries in order to qualify for debt relief, many creditors do not follow through. The program is criticized as having excessively strict conditions that result in inadequate relief and the money is not invested in projects beneficial in the long run.  Opponents also argue that debt relief is like a blank check to governments, and because of corruptness there is no way to ensure that this money will be utilized in the proper manner. There is no way to ensure that these countries will not simply continue to borrow money and incur more debts once they know their debts can be cancelled. Debt cancellation encourages countries to overspend and get help from foreign aid later on. The structural adjustment conditions attached to debt relief attempts have been argued to increase the gap between the rich and the poor and increase the economic dependence on richer countries. The conditions of the HIPC initiative also call for countries to focus more on the structural adjustments called for instead of using money and time on programs to reduce poverty.

External Links for more information:

World Bank

Information on the HIPC Initiative

Democracy Now

Article on Vulture Funds in Zambia

Jubilee debt campaign

The Jubilee debt campaign

Jubilee USA

The Jubilee USA debt campaign

Oxfam

Read about the development organizations attempts to help fight against vulture funds in Zambia

Congress

To write President Bush to ask him to end Vulture Funds’ scavenging of countries in need of debt relief, visit Congress.org.

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