Testimony by Neil Watkins,

National Coordinator, Jubilee USA Network, to the

House Committee on Foreign Affairs, Subcommittee on Africa and Global Health

May 22, 2007

I’d like to thank Chairman Payne, Ranking Member Smith, and members of the committee for the invitation to share this testimony today. I come before you today as a representative of Jubilee USA Network. Jubilee USA is an alliance of more than 80 religious denominations, faith-based networks, development agencies, and labor, environment and community organizations working to generate the political will for cancellation of unjust debts in Africa, Asia, and Latin America. Founded in 1997, the Network is the US arm of the global Jubilee debt cancellation movement.

We are grateful for the committee’s leadership in addressing the critical challenge posed by so-called “vulture funds” to heavily indebted poor nations, especially in Africa.

Debt Cancellation: A Tool to Fight Poverty

Impoverished countries in Africa have been struggling under the crushing burden of international debts for many years, dating to the 1970s. In the late 1990s, Jubilee campaigners across the globe united to bring attention to the debt crisis at an international level; this pressure led to concrete commitments from G-8 leaders and the international financial institutions to provide limited debt cancellation for some of the world’s poorest nations.

Since 1996, when the Heavily Indebted Poor Countries Initiative (HIPC) was created, more than 30 nations have seen some form of debt relief. Congress has demonstrated its support for bilateral and multilateral debt relief through the enactment of comprehensive debt relief initiatives for heavily indebted low-income countries.

In 2005, the United States and other G-8 nations reached an agreement to provide 100% debt cancellation of debts owed by eligible poor nations to Paris Club members, the IMF, the World Bank, and the African Development Bank. The 2005 agreement led to the creation of the Multilateral Debt Relief Initiative (MDRI). As of April 2007, 22 nations, including 18 in Africa, have seen the majority of their debts to the IMF, World Bank, and African Development Bank cancelled under the terms of the MDRI.

Resources released by debt relief efforts to date are reaching the poor. Cameroon is using the US $29.8 million of savings it will gain from the MDRI in 2006 for national poverty reduction priorities, including infrastructure, social sector and governance reforms. Uganda is using its US $57.9 million savings in 2006 on improving energy infrastructure to try to ease acute electricity shortages, as well as primary education, malaria control, healthcare and water infrastructure (specifically targeting the poor and under-served villages). Zambia is using its savings of US $23.8 million under the MDRI in 2006 to increase spending on agricultural projects on smallholder irrigation and livestock disease control, as well as to eliminate fees for healthcare in rural areas.

While debt cancellation has a record of success, there remains an unfinished agenda on international debt. There are a number of challenges to the effective implementation of existing commitments, and broader cancellation of unfair and unjust debts is needed if the global community is to reach the Millennium Development Goals. One of those challenges is the threat posed by vulture funds.

Vulture Funds Are Undermining Debt Cancellation

Jubilee USA Network is extremely concerned about the impact of vulture fund activity on indebted and impoverished nations in Africa and elsewhere. Debt cancellation provides the chance for impoverished countries to start fresh and allocate additional resources to essential health, education, and other spending. Vulture funds are a real threat to the gains we have made in the debt cancellation campaign.

While the US government and the international community were extending debt relief to some impoverished countries, a new form of business emerged, with the purpose of speculating in and profiteering from poor country debt in default. This new business by so-called “vulture funds” comes at the expense of the citizens of these indebted countries – some of the poorest in the world – as well as taxpayers in countries like the US, who have been supporting in part the cost of debt relief. The Jubilee USA Network, together with partners in affected countries like Zambia, and other countries including the UK and Germany, is increasingly monitoring the activity of vulture funds and working to publicize and curtail their activity.

What are Vulture Funds? How Do They operate?

'Vulture fund' is a name given to a company that seeks to make profit by buying up 'bad' debt at a cheap price, then attempts to recover the full amount, often by suing through the courts. Such companies often describe themselves as 'distressed debt funds'. Some target failing companies, but Jubilee USA Network is focused on those that target poor country governments. These vulture fund companies tend to be quite secretive, and many of them are based in tax havens. Some are owned or controlled by large, often US-based, financial institutions such as hedge funds. In other cases, there is limited or no information on who owns them. Often companies are set up simply to pursue one debt, then shut down again.

When an impoverished country has outstanding debt owed to a government or a commercial creditor – that has not been written down or restructured according to HIPC or MDRI terms - there is a chance that a financial organization will seek to buy that debt at reduced prices and seek repayment of the original amount and more. Firms call this capitalizing, but we as debt campaigners consider this vulture activity.

In the past several decades, vulture funds have traditionally focused their activities in middle-income countries such as Peru, where Elliott Associates pursued a lawsuit in the 1990s. But in the past 3 years, the provision of debt cancellation to HIPCs has encouraged these funds to target them as now HIPC nations have more resources—thanks to debt relief from the US government, the international financial institutions, and others. This vulture fund activity has resulted in a growing number of lawsuits being brought against HIPCs.

Before considering the scope of the problem, it is important to note that vulture creditors are not the only creditors that pose a threat to impoverished nations. Other creditors, including non-Paris Club official creditors, smaller multilateral creditors, and quasi-commercial lenders, also continue to make claims on HIPC countries. While the activities of so-called vulture funds have received the most attention, it is important to consider the full range of outstanding claims and threats that African governments are facing.

Scope and Impact of the Problem

According to research by Matthew Martin, Director of Debt Relief International, an NGO which works with developing country NGOs to resolve their debt crises, at least 20 Heavily Indebted Poor Countries (HIPCs) have been threatened with or have been subject to legal actions by commercial creditors and vulture funds since 1999. The debtor governments have almost always lost. There have been some mixed results and settlements out of court. The only known case where a debtor government has won in court is a case in Madagascar. When they lose, the ruling has been that the poor debtor government pay the original debt, interest and fees accrued since the debt has been in arrears, as well as the legal costs of the plaintiff.

Some of the countries that have faced legal actions by commercial creditors and vulture funds include: Angola, Bolivia, Burkina Faso, Cameroon, Republic of Congo, Cote d’Ivoire, Democratic Republic of Congo, Ethiopia, Guyana, Honduras, Madagascar, Mozambique, Nicaragua, Niger, São Tomé and Principe, Tanzania, Uganda, Yemen, and Zambia.

The amounts awarded to plaintiffs have varied from 1 to 6 times the original value of the debt, or $1 million to $153 million. The average has been 2.2 times the original value. More than 14 settlements have exceeded $50 million, a huge sum to pay in one year, especially when compared to other crucial spending needs. Considering these costs comparatively:

• In Uganda and Sierra Leone lawsuit payments were as high as 35% and 34%, respectively, of total debt service in one year.

• In Nicaragua, lawsuit cost was some $425 million in one year, only marginally less than health and education spending combined.
• In Niger, the government spent more than half of what it spent on health and education combined on lawsuits (US$76.5 million).
• In Zambia, health and education expenditure totaled almost US$303 million, while lawsuits cost almost US$127 million.

More than two-thirds of the lawsuits brought by vulture funds occur in the US or UK jurisdictions. This because is in part because these courts are seen as being more creditor-friendly and more efficient. But there are an increasing number of cases being made at the national level, where weaker legal systems get mired in the details of these cases.

Moreover, creditors often threaten impoverished countries with cases, which are then settled out of court. While there is not currently a mechanism to track these threats, one estimate is that more than $400 million has been paid out in settlements by HIPCs in the past three years alone.

The Case of Donegal v. Zambia

The most recent and visible vulture fund case has been that of Donegal International, Limited suing the government of Zambia – and winning $15 million. In 1979, Zambia purchased agricultural equipment and services from Romania on credit. Being unable to service this debt, in 1999 Zambia and Romania agreed to liquidate this debt for $3.28 million. But before Zambia could seal the deal, a vulture - Donegal International - swooped in.

Donegal International, Limited is registered in the British Virgin Islands. Its only business is to pursue the Zambian debt. Donegal's sole director is Michael Sheehan, who owns a company called Debt Advisory International, based in Washington DC. He bought this debt valued at $3.28 million and later sued the Zambian government for $55 million. On April 24^th, the British High Court ruled that the government of Zambia would have to pay Donegal some $15 million. This represents over a third of what Zambia is projected to save in debt relief delivered through HIPC and the MDRI in 2007.

This case is of particular concern to Jubilee USA Network because our organization led a delegation to Zambia in early 2007, to evaluate the impacts of debt cancellation that Zambia has received under the HIPC Initiative and the MDRI. What we saw was hopeful. We visited a rural health clinic – in the Siavonga region – which had abolished user fees thanks to the debt cancellation deal. This meant that while patients in desperate need had previously been turned away, now they had access to vital care and medicines. This was a concrete and positive outcome of debt cancellation commitments.

While in Zambia, we met with the Finance Ministry and learned that Zambia would have about $40 million freed up in its national budget in 2007 thanks to the debt cancellation agreement. But with the victory by Donegal in UK courts last month, Zambia will now have to send more than a third of its debt relief savings this year – to the vultures. This is money that should be used to build more clinics, schools, and provide greater access to basic services to Zambians, not to line the pockets of a wealthy American investor.

Zambia is a clear example of the problem presented by vulture funds. But it is not the only one. We know that there are cases pending, or threats of litigation, at this very moment in Cameroon, Republic of Congo, and Liberia. Action is needed now so that what happened to Zambia will not happen to other impoverished African nations.

Policy Responses: The Bush Administration, the G-8, and the US Congress

The activities of vulture funds clearly undermine the debt relief agreements supported by the US government and other G-8 governments.

In 2005 at the G-8 summit in Gleneagles, Scotland, President Bush and other G-8 leaders announced a new deal on impoverished country debt which would provide “100% debt cancellation” to eligible HIPC countries – expanding beyond previous initiatives which had only provided partial debt relief to eligible nations. Jubilee USA and others welcomed this initiative as an important first step towards broader debt cancellation which is needed to fight poverty.

It is important to note that US taxpayers have been bearing the costs of this important initiative – both the costs of cancelling debts owed by these nations to our government as well as to the World Bank, through the US appropriations to the International Development Association (IDA).

But the activities of vulture funds in Zambia and elsewhere in Africa are clearly undermining US foreign economic policy and the 2005 G-8 debt deal. It is the US national interest to respond with clear proposals and action so that these cases no longer occur, and so that taxpayer funds allocated for debt relief are not used by impoverished countries to compensate vulture funds.

In recent months, in response to heightened publicity and attention from development campaigners, the Bush administration and the G-8 have begun to make statements on the threat posed by vulture funds.

Gordon Brown, the UK Chancellor and soon to be Prime Minister said in a statement in the UK Parliament on May 10, 2007, “I deplore the activities of so-called vulture funds that seek to profit from debts owed by the poorest countries in the world. I am determined to limit the damage done by such funds.” Chancellor Brown also released a list of 6 specific policy proposals to address the problem.

German officials - including Chancellor Angela Merkel and Development Minister Heidi Marie Wieczroek-Zeul - have also indicated their concern about the issue in recent weeks. In a recent meeting with NGOs in Germany, Chancellor Merkel request more information on the subject for inclusion in the summit’s communiqué.

The Bush administration has also expressed concern on the subject, based on the concern that these “vulture funds” are “free-riding” on the multilateral debt deal so tortuously negotiated with US leadership in 2005.

This past weekend, on May 19, 2007, G-8 Finance Ministers met in Potsdam, Germany. They responded to concerns about the activities of vulture funds by stating: “We encourage the use of the debt sustainability framework by all borrowers and creditors in their decisions. We continue to support the development of a charter for responsible lending and seek to involve other interested parties, including the G20. In this context we are concerned about the actions of some litigating creditors against Heavily Indebted Poor Countries. We have agreed to work together to identify measures to tackle this problem, based on the work of the Paris Club.”

The statements of concern from the Administration and other members of the G-8 are welcome, but they must now be followed by strong action. The G-8 summit is less than three weeks from today. The G-8 should commit to specific action at the upcoming G-8 summit, which will be held in Germany from June 6-8, 2007.

Congress can play a critical role by encouraging and working with the Administration to develop and support specific policy proposals to address the challenge presented by vulture funds.

Specifically, we are calling on the Bush Administration and G-8 leaders to:

1. Urge the World Bank to more aggressively buy back outstanding commercial debts in all eligible countries to get at-risk debts out of the public domain. The World Bank should expand the IDA debt reduction facility so that it is available to Heavily Indebted Poor Countries (HIPCs) before they reach decision point and allow repeat operations for all eligible countries. Opening the facility before decision point would be particularly helpful to Liberia, which faces more than $1 billion in hedge fund debt claims. Furthermore, the debt eligible for IDA debt reduction facility operations should also include debts owed to “semi-commercial” enterprises of non-OECD countries.

2. Support the development of codes of conduct for commercial creditors and a Charter for responsible lending which includes binding requirements that creditors not sell or re-assign sovereign debts owed by nations eligible for debt cancellation without explicit approval of the debtor.

3. Increase technical and legal assistance to all HIPCs with debts at risk.  This support should be extended to prevent lawsuits from being brought against governments and to help once there is a suit.  

4. Ultimately, G-8 leaders must work for changes in national laws to make vulture fund profiteering illegal.

Action is needed in the short-term while broader changes are made to truly stop the practices of vulture funds. The first three policy proposals can be accomplished quickly with support of the G-8 and international financial institutions. Meanwhile, Congress should investigate viable changes in US law which would discourage or forbid profiteering by vulture funds in the future.

A soon-to-be introduced piece of legislation, the Jubilee Act for Responsible Lending and Expanded Debt Cancellation, will likely include several provisions on the issue of vulture activity. This is one specific legislative approach that members can support while more comprehensive legislation is in development.

Conclusion

Debt cancellation is a critical and effective tool in the fight against poverty in Africa and across the global South. Vulture funds threaten to undermine the effectiveness of debt cancellation. Action must be taken now to ensure that the gains from debt cancellation are preserved.

While vulture funds are a critical issue, it is also important to remember that vulture funds are one piece of a broader unfinished agenda on international debt. More countries need access to the benefits of debt cancellation. According to Oxfam International, even after debt relief, low-income countries still pay $100 million each day in debt service payments in 2005. As we address the problem of vulture funds, let us also work to expand the life-saving promise of cancellation of unjust debts to all impoverished countries so that they can meet the Millennium Development Goals.