Corporation buys a Nations Debt, then sues them for repayment.

Corporation buys a Nations Debt, then sues them for repayment.

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John Ahni Schertow
February 15, 2007
 

Zambia loses ‘vulture fund’ case
http://news.bbc.co.uk
February 15, 2007

A High Court judge has ruled that Zambia must pay a substantial sum to a so-called “vulture fund”.

British Virgin Islands-based Donegal International paid less than $4m (£2m) for a debt the African nation owed, but sued Zambia for a $42m repayment.

It said its bill was the result of interest and costs, but the judge has indicated that Zambia should pay less.

The ruling has angered anti-debt campaigners, who say it will undermine Zambia’s plans for poverty reduction.

The judge ruled against Zambia’s application to dismiss Donegal’s claim, but at the same time proposed to end a freeze of Zambian assets secured by the fund.

Donegal, however, will have a chance to argue the case for a continued freeze of Zambian assets.

According to BBC economics reporter Andrew Walker, people familiar with the case believe that the judge will order Zambia to pay Donegal between $10m and $20m, less than half what Donegal sought.

Lawyers for Zambia, however, said the judgement was a victory for Zambia.

Janet Legrand of DLA Piper called the ruling “fantastic news for both the government of Zambia and its people”.

The fight against Donegal’s claim had been “entirely vindicated and [marked] a significant milestone in the efforts of [the Zambian government] to fight corruption and maintain a stable economic course”.

Concerns

Vulture funds – as defined by the International Monetary Fund and UK Chancellor Gordon Brown among others – are companies which buy up the debt of poor nations cheaply when it is about to be written off, then sue for the full value of the debt plus interest.

There are concerns that such funds are wiping out the benefits which international debt relief was supposed to bring to poor countries.

A Zambian presidential adviser and consultant to Oxfam, Martin Kalunga-Banda, said $42m was equal to all the debt relief it received last year.

He told the BBC that this would take a serious toll on education in Zambia.

“It also means the treatment, the Medicare, the medicines that would have been available to in excess of 100,000 people in the country will not be available,” he added.

Mr Kalunga-Banda added that while the repayment might be legal, it arose from debts accrued when the country was under “an undemocratic system”.

“The consequences of the debt are impacting on the people of Zambia,” he said.

“The Zambians at that time did not even have even the capacity to know this was happening and that is probably what brings in this issue of unfairness.”

‘No comment’

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.

Debt Advisory International founder Michael Sheehan was confronted by the BBC’s Newsnight programme before the court ruling, but said only: “No comment. I’m in litigation. It’s not my debt.”

In 2002, Gordon Brown told the United Nations that the vulture funds were perverse and immoral.

“We particularly condemn the perversity where vulture funds purchase debt at a reduced price and make a profit from suing the debtor country to recover the full amount owed – a morally outrageous outcome.”

Jubilee Debt campaigner Caroline Pearce said that vulture funds “made a mockery” of the work done by governments to write off the debts of the poorest – a key theme of 2005’s Live8 concert.

“Profiteering doesn’t get any more cynical than this,” Ms Pearce said.

“Zambia has been planning to spend the money released from debt cancellation on much-needed nurses, teachers and infrastructure.

“This is what debt cancellation is intended for, not to line the pockets of businessmen based in rich countries.”

(source)

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