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TWN Info Service on Finance and Development (Feb07/03)

21 February 2007


THREAT TO DEBT-RELIEF COUNTRIES SHOWN BY ZAMBIAN DEBT CASE

A High Court in London ruled on 15 February that a ‘vulture fund’ which bought a portion of Zambia’s sovereign debt almost a decade ago had the right to enforce the agreement but the judge in the case has criticised the fund’s manager and his associates for their dishonesty and evasiveness in presenting evidence in the case. It is also expected that the court will not order Zambia to repay the full amount sought (in a hearing next month). 

This case has brought to light a growing problem of indebted developing countries whose multilateral debts have been cancelled, only to face commercial litigation from so-called ‘vulture funds’ that exploit the poor countries.


Some analysts believe that the new wave of commercial creditor litigation against developing countries is due to the perception that those countries that have obtained debt relief are now more credit-worthy and also are more capable of making payments to the vulture funds.

Below is a report on the case brought against Zambia by the investment company, Donegal International.

It was published in SUNS #6193 Monday 19 February 2007.

With best wishes
Martin Khor


Threat to Debt-Relief Countries Shown By Zambian Debt Case


By Celine Tan (Third World Network)

A High Court in London ruled on 15 February that a ‘vulture fund’ which bought a portion of Zambia’s sovereign debt almost a decade ago had the right to enforce the agreement but the judge in the case has criticised the fund’s manager and his associates for their dishonesty and evasiveness in presenting evidence in the case.

It is also expected that the court will not order Zambia to repay the full amount sought (in a hearing next month).  Although judge Mr Andrew Smith reiterated that he was considering the case based on its legal merits, he alluded in his judgment to the “strong feelings” that the case aroused due to Zambia’s position as a poor and vulnerable country.

Zambia had acted to dismiss the claims against it by US investment company, Donegal International, which had sought to enforce payments of up to $55 million in respect of a debt which the company bought from Romania in 1999 for $3.2 million.

This case has brought to light a growing problem of indebted developing countries whose multilateral debts have been cancelled, only to face commercial litigation from so-called ‘vulture funds’ that exploit the poor countries.


Some analysts believe that the new wave of commercial creditor litigation against developing countries is due to the perception that those countries that have obtained debt relief are now more credit-worthy and also are more capable of making payments to the vulture funds.

In this case, the amount claimed by Donegal International was equivalent to the debt relief that Zambia recently obtained from bilateral and multilateral official creditors. Even if Donegal obtains only part of the claim it has demanded, this would significantly offset the benefits to Zambia of its debt relief.

Debt campaign groups have condemned the action taken by Donegal International. The World Bank as well as UK Chancellor, Gordon Brown have also voiced concerns about the opportunistic activities of ‘vulture funds’.

According to news reports and press statements, the debt in question stemmed from a loan to Zambia by Romania in 1979 for the purchase of agricultural machinery and services. Zambia was unable to keep up the repayments and the two countries were on the verge of renegotiations to liquidate the debt for a payment of $3 million when Donegal International bought the heavily discounted debt for $4 million.

Donegal International, which is registered in the British Virgin Islands and owned by US businessman Michael Sheehan, then negotiated a settlement with the country to repay the debt to the value of $15 million but the agreement included severe interest penalties if Zambia defaulted on payments under the settlement.

Donegal International proceeded to sue Zambia for the full value of the debt plus interest and legal costs, a claim which Justice Smith said was unlikely to be justified given the severe nature of the penalties for default under the settlement contract and the misleading nature of the evidence under which the agreement was secured.

The BBC reported that those familiar with the case expect that the judge will order Zambia to pay Donegal International between $10 and $20 million, half its claims against the country.

According to a report by The Lawyer.com, the judge had concluded that Sheehan “had lied or misled the courts of three different jurisdictions in relation to the debt, while his consultants were “dishonest and thoroughly unreliable” and recommended that the injunction over Zambia’s assets be discharged. Zambia’s assets in London had been frozen pending the case.

Justice Smith also criticised the “careless” and “cavalier” attitude that Sheehan and his company displayed when presenting evidence on the agreement and the company’s own business practices.

The judge however dismissed Zambia’s claims that Zambia’s agreement to the initial debt buy-out by Donegal International was secured through bribery and corruption.

The Zambian legal team, led by UK Prime Minister Tony Blair’s brother, William Blair QC, had claimed that Donegal International paid $2 million into former Zambian President Frederick Chiluba’s favourite charity in return for a favourable deal. Sheehan had denied that this payment was a bribe, responding to a BBC Newsnight reporter that it was “a charitable donation” to “a low income housing initiative” in Zambia.

Debt campaigners have reacted furiously to the case although the High Court decision itself received mixed reactions. Although welcoming the decision that Zambia should pay a much-reduced sum to the claimants, campaign groups such as the Jubilee Debt Campaign (JDC), UK and Oxfam Great Britain, are angry that the case was ever brought to court.

Trisha Rogers, director of JDC which campaigns for Third World debt cancellation, called the claims by Donegal International an “opportunistic profiteering of the worst kind” while Oxfam GB’s director of campaigns Adrian Lovett called the case “an outrageous injustice which could and should be addressed by the international community”.

Lovett said that while the judge was unable to dismiss the case against Zambia on legal grounds, there was clear evidence that the claims were “immoral” since it was “unconscionable to pursue an inflated claim for debt that should have been written off years ago” and against a country as poor as Zambia “in desperate need of money to pay for basic services like health and education”.

Meanwhile, Gail Hurley, policy officer with the European Network on Debt and Development (Eurodad) said: “The ruling comes as a big blow and gives legitimacy to some of the most predatory and immoral banking practices out there. It is not acceptable for companies such as Donegal International to undermine poverty reduction efforts in one of the world’s most impoverished nations”.

The Zambian case has highlighted the increasing problem of commercial litigation faced by many indebted countries which have, ironically, been recently freed of much debt by international debt cancellation programmes. It has also exposed the practices of the so-called ‘vulture funds’ that prey on vulnerable countries.

The term ‘vulture fund’ is used to refer to investment companies which buy up debt on the international markets at below market value with the objective of enforcing claims of repayment at full value plus interest at a later date.

The debt is usually heavily discounted because of its low chance of repayment. However, with countries such as Zambia being recently freed from much of its official debt due to debt cancellation, there is a concern that this may serve as an incentive for such practices.


Gordon Brown, who also chairs the International Monetary and Financial Committee (IMFC), the political governance body of the International Monetary Fund (IMF), has previously condemned such ‘vulture funds’ and a Treasury official contacted by The Guardian newspaper yesterday called the depletion of developing country resources in this manner “socially irresponsible”.

The total amount claimed by Donegal International was equivalent to the debt relief secured by Zambia through the Heavily Indebted Poor Countries (HIPC) initiative and the recent Multilateral Debt Relief Initiative (MDRI) from bilateral and multilateral official creditors.

Zambia has had to undergo strict economic restructuring under the supervision of the IMF and the World Bank, including the implementation of strict economic policy conditionalities, for six years before becoming eligible for debt relief under these schemes.

Observers and debt campaigners have suggested that it is due to the increased creditworthiness of countries which have had their debt cancelled that is prompting a new wave of commercial creditor litigation against developing countries.

The World Bank has also expressed concern over such practices, calling such behaviour ‘free riding’ as creditors take advantage of the fiscal space freed up by debt relief from other creditors. Countries are also having to spend a great deal of resources on defending such claims on them, funds which could be better used for developmental purposes.

Rogers called for the establishment of “a fair, comprehensive and binding framework for dealing with poor country debt, which will ensure that commercial creditors will never again have the chance to profit in this way”. She also called upon Brown to use his position to put a stop to the “predatory practices” of the ‘vulture funds’.

JDC and other debt groups, such as Eurodad, have also repeatedly called for a principle of “creditor co-responsibility” to be established as practice in debt transactions to hold creditors responsible for loans made to developing countries without due diligence or under spurious circumstances or for dubious purposes.

According to these debt campaigners, debt that is disbursed without regard for the economic situation of the country involved or assumed through corrupt transactions, without regard to the needs of its citizens, should be declared as “illegitimate” and should not be repaid.

Last year, the Norwegian government unilaterally cancelled $80 million worth of debt owed by five developing countries in acknowledgement that the debt was extended irresponsibly and without due regard for the developmental needs of the recipient countries.

For more details on the Zambian case, see: Oxfam press release:

http://www.oxfam.org.uk/applications/blogs/pressoffice/2007/02/vulture_fund_must_not_take_cas.html


BBC News Report:
http://news.bbc.co.uk/1/hi/business/6365433.stm

 


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