Sunday, February 18, 2007

"Vulture Fund" Wins Partial Victory over Zambia

Zambia Loses ‘Vulture Fund’ Case

A British high court judge ruled that Zambia must pay a substantial sum to an investment fund that some are calling a “vulture fund.” Vulture funds – as defined by the International Monetary Fund – are companies which buy the debt of poor countries 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 is supposed to bring to poor countries.

In 1979, Romania lent Zambia money to buy Romanian tractors. After Zambia was unable to keep up the payments, in 1999, Romania and Zambia negotiated to liquidate the debt for $3 million. However, before the deal was finalized, British Virgin Islands-based Donegal International stepped in and bought the debt from Romania for $4 million.

Donegal, which is partially owned by U.S.-based Debt Advisory International (DAI), paid less than $4 million for the debt, but sued Zambia for a $42 million repayment. While Donegal alleged that the high bill was the result of interests and costs, the judge indicated that Zambia should pay far less than $42 million.

Critics of the decision say that the repayment will undermine Zambia’s plans for poverty reduction. Many are relieved that Zambia does not have to pay the full amount.

Martin Kalunga-Banda, a Zambian presidential advisor, said $42 million was equal to all the debt relief Zambia received last year. He also stated that the repayment, though legal, would have a negative impact on the country’s education and medical system. Mr. Kanlunga-Banda added that the debt accrued when the country was under an “un-democratic system” and that “Zambians at that time did not even have the capacity to know this was happening.”

Anti-debt campaigner Caroline Pearce said that vulture funds “made a mockery” of the work done by governments to write off the debt of the poorest. “This is what debt cancellation is intended for, not to line the pockets of businessmen based in rich countries,” she said.

Question: Some would say that the debt relief system has many flaws and loopholes, including the availability of vulture funds. Should “vulture funds” be legal?

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