Debt Relief Bill takes action on ‘vulture funds’

By Ian Pearson, Economic Secretary to the Treasury

The recent Haiti earthquake has again brought to the fore the plight of low-income countries facing an unsustainable debt burden. Since 1996, international action – in which the UK has played a pivotal role - has delivered substantial debt relief for the world’s poorest countries. As a result, hundreds of millions of people live in countries now able to develop freed from this burden.

However, a minority of commercial creditors – including so-called ‘vulture funds’ – are free-riding on this relief. They use the legal system to force full repayment of their debts, diverting development aid away from those it aims to help. Andrew Gwynne MP has introduced a Private Member’s Bill to prevent this abuse, with my strong support along with that of the Government.

The crippling problem of debt in developing countries is well known. By the 1990s many low-income countries faced a debt crisis, with interest payments costing more than health and education spending combined. Creditors had little if any prospect of being fully repaid. In response, the international community set up the Heavily Indebted Poor Countries Initiative.

The Initiative targets 40 countries with a total population of over 600 million, facing both high levels of poverty and unmanageable debt burdens. It sets the level of reduction needed from all creditors to return the countries’ debts to sustainable levels. Once the World Bank and IMF assess that a country has made progress so that the benefits of relief can be directed towards economic growth and poverty reduction, every creditor is expected to reduce their debt to the set level. Many, including most commercial creditors, already do so. The UK and others go further and cancel their debts.

The benefits of this debt relief are clear: the countries affected now spend on average six times more on health and education for their citizens than they do on interest payments to foreign creditors, and they have achieved faster economic growth than before.

But the benefits could and should be even greater. A minority of commercial creditors have chosen to exploit debt relief by suing for the full value of old, previously unpayable debts and the accumulated interest. This action siphons resources that UK taxpayers and others intended to tackle poverty. Companies that have adopted this as a business model - buying up defaulted debts cheaply and extracting large profits from litigation - have been termed ‘vulture funds’. The Jubilee Debt Campaign among others has rightly focused attention on the damage caused.

The Government has already taken action to tackle the issue. We support and fund the World Bank’s Debt Reduction Facility, which negotiates voluntary buy-backs and cancellation of debts where relief is due. Last April, the Facility bought back and cancelled 97.5% of Liberia’s eligible commercial debt for only 3% of its face value of $1.2bn. But in November, the High Court gave judgment for $20m, in a claim brought by two commercial creditors against the country, allowing them to seek to enforce full repayment here.

We need to change the law to prevent creditors from taking this path. Commercial finance can help – not hinder – development in low-income countries. The Private Member’s Bill seeks to prevent creditors from recovering an amount in excess of the debt relief expected. The Government, which consulted on legislation last year, will be supporting the Bill when it’s debated on 26 February. Parliament has a chance to make sure that millions of the world’s poorest people gain maximum benefit from the debt relief that we provide. Parliamentarians from across the political spectrum can bring this about by helping the Bill to become law.