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Robert Naiman, Just Foreign Policy, February 20, 2007

Imagine this. Suppose the UN Security Council were to impose financial sanctions on Iran, supported by the U.S. The U.S. moves to implement the sanctions, forcing U.S. banks to cut off their relationships with Iranian banks. Now suppose that there is a financial institution based in the British Virgin Islands that moves in to fill the gap, providing credit to Iranian banks previously supplied by U.S. banks. Moreover, suppose the owner of this financial institution in the British Virgin Islands was based in the U.S.

This wouldn't be allowed, right? The Treasury Department would do everything in its power - and their powers are considerable - to keep this person and this financial institution from undermining U.S. foreign policy.

Now suppose that we are talking about international debt relief. Suppose that there is a huge international movement to stop the poorest countries in the world from being forced to cut spending on education and health care so they can service debt to the richest countries in the world and the international financial institutions, like the IMF and the World Bank. Suppose this movement in successful in getting the creditors to agree that much of this debt should be written off in the broad interest of humanity. Now suppose a "vulture fund" based in the British Virgin Islands swoops in and buys some of the debt that is supposed to be canceled, and demands full payment. Suppose a British court rules that the claim is valid, maybe not the full amount, but enough to severely undermine the international debt relief program in the case of Zambia.

This wouldn't be allowed, right?

But it is being allowed, the BBC reports. The British Virgin Islands-based financial institution is Donegal International. The owner is Michael Sheehan. He has an office in Washington, D.C.

Why is the U.S. government allowing this? Why isn't Congress compelling the Treasury Department to take action to stop it?

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www.justforeignpolicy.org/involved/vulture_fund.html
 

Originally posted to Robert Naiman on Tue Feb 20, 2007 at 10:05 AM PST.

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Should the U.S. prevent "vulture funds" from undermining debt relief for poor countries?

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| 22 votes | Vote | Results

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Comment Preferences

  •  I might be confused here (0+ / 0-)

    But I thought debt relief was usually governments forgiving debts owed to the government---not forcing private individuals and companies to cancel their debts.  Am I missing something?

    "See a world of tanks, ruled by a world of banks." —Sol Invictus

    by Delirium on Tue Feb 20, 2007 at 10:07:09 AM PST

    •  Re: I might be confused here (1+ / 0-)
      Recommended by:
      Alegre

      As this example shows, public and private can overlap.

      From the BBC article:

      In 1979, the Romanian government lent Zambia money to buy Romanian tractors.

      Zambia was unable to keep up the payments and in 1999, Romania and Zambia negotiated to liquidate the debt for $3m.

      But before the deal could be finalised, Donegal International, which is part owned by US-based Debt Advisory International stepped in and bought the debt from Romania for less than $4m.

      •  It's A Liquidity Issue (1+ / 0-)
        Recommended by:
        burrow owl

        Country A has both publicly and privately held debt.

        Country B, which holds a portion of the debt, grants forgiveness, with the intention of freeing the country to undertake internal development financing. Suddenly Country A can take the money going into loan repayment for its publicly held debt and use it for other purposes.

        Except that a Vulture Fund which bought the privately held debt for pennies on the dollar seeks a court injunction to force Country A to use its new-found liquidity to pay off the privately held debt.

        •  Somewhere, a lawyer is losing his/her job (1+ / 0-)
          Recommended by:
          greenskeeper

          I couldn't imagine there aren't ways to structure this kind of interaction without freeing up capital and exposing it to private creditors.  

          Alternately, Romania dropped the ball by not imposing restrictions on collections of the debt when it sold to the vulture fund.

          More likely, I suppose, Romania doesn't really give a shit about the ball if it can get some kind of return on it.

      •  that sounds like Romania's fault, not Donegal's (0+ / 0-)

        If Romania agreed to forgive the debt, then selling it instead of forgiving it is a violation of that.  I don't see how the buyer is at fault, unless they somehow coerced Romania into selling it.

        "See a world of tanks, ruled by a world of banks." —Sol Invictus

        by Delirium on Tue Feb 20, 2007 at 02:56:53 PM PST

        [ Parent ]

  •  I wonder where the money is going from (0+ / 0-)

    Vultures.   I wonder how much of this goes to the repub party?  Conyers is working on this. The US could give 10 million to Zambia to pay off loans, and vultures(sheehan)buys part of that loan.  Now, US pays Zambias money to vultures because they own the loan. How much of that money(tax Payers) gets funneled back to the repub-con men.

    "Though the Mills of the Gods grind slowly,Yet they grind exceeding small."

    by Owllwoman on Tue Feb 20, 2007 at 10:13:03 AM PST

  •  At this point (0+ / 0-)

    If I were a citizen of a poor country, I'd seriously consider whacking these guys trying to keep my face pressed to the dirt so they can buy another condo at Aspen.

    •  Watch out for unintended consequences (0+ / 0-)

      If I were an investor and knew there was a risk of "getting whacked" for lending to developing nations, do you think I'd invest?  I probably wouldn't lend money, either, if I knew that secondary markets for debt were being killed off through legal injunctions against collection.  

      Or, I would loan, but I'd charge a whopper of a premium for the privilege.

  •  It sounds pretty consistent (0+ / 0-)

    with what happens in debt collection.

    Even though a creditor decides to writes off your debt, a debt collector can still buy your debt from the creditor at, say, 10 cents on the dollar, and try to collect the full amount of the debt from you, and then some.

    The above scenario sounds like the creditors are aware of this, but are trying to generate positive PR for themselves by making it appear as if they are providing debt relief.

    Public image vs. reality.

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