Vultures Have Rights, Too

There is near universal agreement among those who pay attention to such issues that the debt load of the world’s poorest developing countries is obstructing their efforts to climb out of a very deep hole of poverty. The premise of this view, which seems unassailable, is that the resources necessary to pay even the interest on the debt consumes the resources that otherwise would be available to finance development. The debt is owed to developed country governments, the international financial institutions and, to a lesser extent, private investors. It is sovereign debt and, as they have done throughout history, private investors have acquired some of the debt at bargain basement prices, speculating on a future in which the debts might be paid.

Developed countries and their financial institutions implemented measures to provide debt relief to the developing countries with the Heavily Indebted Poor Countries (HIPC) initiative, established in 1999, and the Multilateral Debt Relief Initiative (MDRI) that was adopted at Gleneagles in 2005. While the Jubilee Debt Campaign estimates the debt totals in excess of $2.9 trillion, the debt relief delivered or committed under these initiatives is in excess of $110 billion, according to HM Treasury’s July 2009 consultation, “Ensuring effective debt relief for poor countries.” While laudable, the relief so far is a paltry sum in the larger scheme of things.

Nibbling at the margins of the task, some have argued that the private investors’ punts may pay off only because the governments, i.e. the taxpayers, have written off the debt they held, thereby releasing the hold on the resources needed to pay off the balance owed and now held by the private investors. Comparing them to “vultures” that prey on the carrion of dead animals, Members of Parliament and the U.S. Congress have proposed legislation to prevent the investors from profiting from the generosity of debt relief. Sally Keeble MP introduced a Restriction of Recovery Bill in the House of Commons in May 2009, and Congresswoman Maxine Waters introduced her Stop Vulture Funds bill in Congress in June. The UK legislation would set a cap on recovery of “non-cooperating” investors who won’t voluntarily take less than they are owed, unless the courts consider it just and equitable to order otherwise; while the more draconian US bill would bar the investor’s access to the federal courts altogether.

The fundamental problem is that there is no global mechanism for the resolution of sovereign bankruptcy. When a going concern like General Motors has liabilities greater than its assets and ability to pay, bankruptcy exists to re-organize or liquidate its debts and start over. Under most bankruptcy schemes, everybody “cooperates” whether they want to or not and receive less than they are owed or nothing at all, and often the wage earner comes out poorly in the end. But so far, a country like Zambia cannot file a bankruptcy to avoid paying a sovereign debt owed to a company registered in the British Virgin Islands whose only asset is the sovereign debt it purchased for a fraction of its face value.

The proposed medicine may be worse than the illness it is intended to remedy, and we might question whether the illness is life threatening in any event. According to HM Treasury’s consultation, only $4.3 billion in debt relief is expected from the private sector, and claims totaling $1.2 billion have been already litigated, with no new cases filed in 2007-2008. In relative terms, these are puny sums and the proposed remedies beggar thy neighbor.

Of greater concern yet, is the impact of these proposals on such bedrock principles as the rule of law, rights to property, access to justice and compensation for expropriation. To be sure, legislatively reducing the amount of a debt, outside of a bankruptcy in which the interests of all stakeholders is adjudicated, is the equivalent of expropriating the investor’s property and seemingly in violation of the European Convention on Human Rights’ protections for property rights and requirements of proportionality. In the US, we would call it a partial “taking” in violation of the Due Process Clause and other provisions of the Constitution. Barring access to courts is a denial of justice. These are complaints usually made about third world despots. We can do better.

Developing country debt is every bit as toxic as any traunch of ill advised securitized sub-prime residential mortgages in the developed world. While the world’s public and private bankers continue to work themselves out of the current conditions, now is a good time to enact comprehensive and meaningful cancellation of developing country debt. It should be done while respecting the rule of law.