Tackling the threat of 'vulture funds'
The benefits of debt relief can be reduced by the actions of so-called ‘vulture funds’. These are companies that buy up the debt of poor countries and then sue for the full value of the debt plus interest. DFID thoroughly deplores vulture funds and the UK Government has taken a leading role in combating the damage caused by their activities.
We have concentrated our efforts in two areas:
- preventing debts from falling into the hands of vulture funds
- helping countries to defend themselves
This strategy has paid off. For example, in the case of Nicaragua, where all legal proceedings against the country were dropped, ending two thirds of all pending cases against Heavily Indebted Poor Countries (Heavily Indebted Poor Countries that have completed the HIPC Initiative). This was possible through donor assistance to the World Bank’s Debt Reduction Facility.
This facility helps countries buy back their commercial debts, protecting them from vulture fund activity. Nicaragua bought back its debt through the facility, eliminating claims worth $1.37 billion. This was achieved at a substantial discount for the country – creditors had agreed to receive only 4.5 percent of the outstanding debt. More than $9 billion of poor countries’ debts have already been cancelled in this way, and we have recently succeeded in further improving the effectiveness of the facility. We have therefore committed more funds - up to £10 million - for future operations.
We have also supported countries to fight legal cases. For example, we helped Zambia to pay its legal fees when it was targeted by a vulture fund in 2007. This case demonstrated the value of high quality legal advice: the court reduced Zambia’s liability by around $40 million. This represents two-thirds of the country’s annual budget for primary schools.
The African Development Bank, with our support, has recently established a facility that will help countries to access the legal expertise necessary to defend themselves. We have committed £5 million to this facility, which we believe will play an important role in reducing the harmful impacts of vulture fund activity.
