How to fight against vulture funds?

To enable countries to keep their full resources and carry out their development programs, several agencies and organizations focused on ways to fight against vulture funds. Platform Debt & Development and the National Centre for Development Cooperation (NCCD-11.11.11), elaborated a comprehensive report entitled A vulture may conceal another, or how our laws encourage predators indebted poor countries. Most of the proposals contained in that report are summarized below.

• On the contractual side: It is possible to immediately introduce the following clauses in contracts between States and creditors, either by direct inclusion in new contracts, either by amendment to the contracts already signed, which implies a renegotiation of the contract that must be accepted by creditors. These clauses are:

◊The prohibition to assign to third parties the contract or debts, unless prior consent of the State;

◊Prohibition of securitizing loans and debts;

What's doing ALSF?

What consequences for developing countries?

These practices have the effect of diverting a portion of development assistance, as vulture funds generally expect that challenged States will benefit from debt relief and recover some credit before being sued and in order to make profit on discounts granted by institutional creditors.

In the end, the most vulnerable developing countries are denied resources that could be dedicated to social programs or education.

What missions of ALSF?

The overarching goal of the ALSF is to help maximize resources available for economic development and social progress in RMCs. This will be done by enhancing the access of RMCs to technical legal advice in dealing with lawsuits and other claims brought by vulture funds as well as in some other ancillary areas that enable the building of capacity.

In accordance with the overarching goal, the objective of the Facility focus on harnessing the gains from debt relief granted HIPCs, minimizing the diversion of those debt relief gains for purposes other than those agreed under the debt relief framework, strengthening assistance granted to HIPCs, fragile states and post-conflict countries, thereby enabling those RMCs to address the challenges posed by vulture funds. Specifically, the Facility will provide resources for (a) obtaining specialist legal assistance for the negotiation and/or litigation of vulture fund claims, and (b) building legal capacity on the continent to deal with this primary objective. As an ancillary objective, the Facility will enhance the capacity of RMCs to negotiate complex commercial transactions, including those in the natural resource sector, but this will be done on a reimbursable fee-basis.

To enable achievement of the stated goals and the implementation of its work, grants of financial resources would be mobilized in support of the work of the Facility. Resources so mobilized will be kept segregated in order to permit donors to contribute to both or either of the objectives of the Facility.

The Facility will be lodged at the Bank and would be an instrument to compliment the Bank’s work towards poverty reduction and the collective international efforts towards the Millennium Development Goals designed to improve the standard of living in developing countries.

Who are the vulture funds, how do they operate?

Vulture funds are speculators who buy the debt(s); deemed to be irrecoverable, of distressed nations at low prices on the secondary debt market. The primary debt market is a market where property rights or claims are processed in stocks or bonds traded at a defined value, called the issue value. This process is called securitization. The secondary debt market is distinguished from the primary market in that the sale price of shares is below its issue price. The lower the price, the more the market believes the debtor can not repay its debt.

What about ALSF?