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21 July 2009

Legislation to ensure effective debt relief for poor countries

The Government is today launching a consultation on legislation that would protect 40 of the world’s poorest, most heavily indebted countries from the behaviour of a minority of commercial creditors, such as so-called ‘vulture funds’. These creditors do not co-operate with international debt relief initiatives and instead seek to exploit the debt relief being delivered by the UK, and other creditors, by litigating to extract the full nominal value of these debts through the courts.

The UK has led the international community in providing debt relief to the world’s poorest countries.  Over $110bn has been committed internationally to these countries to support their economic growth and poverty reduction strategies. But the actions of those creditors who do not provide their full share of debt relief, and instead pursue their own claims in full through the courts, threaten to undermine this international approach.  For example, so-called ‘vulture funds’, who buy up defaulted debts at very low prices when a country is in economic distress and aggressively litigate to recoup the debt’s full value. This can negate the benefits of debt relief provided by others. The Government is determined to ensure that these activities do not prevent resources being freed up to finance development and tackle poverty in the poorest countries.

The Government has already taken a range of actions to tackle this problem.  Today it is consulting on the possibility of complementing these efforts with legislation that would restrict the proportion of the debts of these countries that a creditor could reclaim under UK law. 

The Government remains committed to smoothly functioning financial markets and the right of creditors to have recourse to the law. The proposal is therefore tightly targeted at the debts of the 40 countries that qualify for international debt relief initiatives and excludes new lending.

On launching the consultation, Ian Pearson MP, Economic Secretary to the Treasury, said:

“I am pleased that through this consultation the UK is once again leading efforts to ensure that poor countries get the debt relief that they need. It is vital that all creditors play their part in debt cancellation initiatives. And the proposals we are consulting on today are designed so that companies are unable to profit at the expense of Heavily Indebted Poor Countries by seeking to claim the full value of these debts under UK law.”

Gareth Thomas MP, Minister of State for International Development, commented:

“It is important that we take strong action to ensure the world's poorest people receive the benefits of debt relief. The money saved through debt relief allows poor countries to spend more on schools, hospitals and other vital services.

This consultation proposes to heavily restrict the actions of creditors that do not participate in debt relief, for example vulture funds.  For too long, some companies have been allowed to get away with exploiting the debt relief received by developing countries for their own profit; taking vital resources away from those that need it most.”

The consultation is available on the HM Treasury website and contributions are welcome.  The consultation will run for 12 weeks, concluding on 9 October 2009.

Notes for editors

1. 40 countries qualify for international debt relief under the Heavily Indebted Poor Countries Intiative and the Multilateral Debt Relief Initiative. The IMF website summarises both  the HIPC Initiative and MDRI. The UK was instrumental to the agreement of both these initiatives, and goes beyond what they require.  More information on the UK Government’s additional debt relief can be found on   the HM Treasury website.

2. Parliament has recently considered the Developing Country Debt (Restriction of Recovery) Bill introduced by Sally Keeble MP.  Early Day Motion 1440 is also relevant.

 

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