24 February, 2010
In the international financial system, the Rule of Law seldom applies.
It is in this context that a wake of vultures (for that is the collective noun) hovers over weakened debtor nations as diverse as the Congo, Iceland, Greece and Portugal and operate within weak international law.
They are international creditors, and their presence reminds us once again of the urgent need for governments to co-operate to devise international law to protect effectively insolvent sovereign nations from rapacious creditors. In just the same way that e.g. the US’s Chapter 11 protects insolvent companies from creditors.
Professor Kunibert Raffer of the University of Vienna has long argued for a framework for sovereign nations that simulates Chapter 9 of the US Legal code by protecting American governmental bodies (such as City governments) and their citizens from predatory creditors in the event of insolvency.
In the absence of effective law, the most invidious of these predators are ‘Vulture funds’ – i.e. investors that specialise in buying up distressed debt at a discount – and then claiming 100% from the debtor or more invidiously, from the sovereign debtor’s creditors. While these investors might provide relief to creditors unable to pursue the debtor for repayment – their ability to claim full payment from sovereign debtors whose status is such that taxpayers in creditor countries have granted substantial debt relief – is unacceptable.
There is a report today (FT 24 Feb 2010) that one such Vulture fund (FG Hemisphere Associates) has been granted the right by a Hong Kong court to make (or attach) a claim on a Chinese government payment to the Congo (for valuable minerals) – as a way of grabbing re-payment for an outstanding loan to the Congo.
Vultures choose their moment to pounce and scavenge.
A good moment for making such claims is once a poor country has been granted debt relief by its public (governmental and multilateral) creditors. After such relief there tends to be a little more hard currency (dollars, sterling or yen) in the central bank’s coffers – so the vultures return to scavenge.
But ‘Vultures’ can also take the form of something known by the collective noun of ‘the bond market’ – private institutions which have the power to raise interest rates on loans (bonds) taken out by distressed debtors, such as Greece.
They can also take the shape of powerful sovereign creditors, such as Britain and the Netherlands. Both governments (joint population 76 million) are currently demanding that Iceland (population 320,000) compensate British and Dutch taxpayers in full – for the losses of a private bank that operated under the noses, and with the tacit approval, of British and Dutch and EU regulators. This is equivalent to each Icelander (farmers and fishermen on the whole) paying two rich countries £11,000 per person.
As John Kay points out tellingly in today’s FT: the people of Scotland were never expected to find £500,000 each, to help finance the taxpayers’ massive losses and liabilities as a result of bailing out the biggest private corporate bankruptcy in British history – that of the Royal Bank of Scotland.
These double standards must end.
As Kunibert Raffer has argued: it “is the most basic precondition for the functioning of the market mechanism that economic decisions must be accompanied by (co)responsibility: whoever takes economic decisions must also carry financial risks. If this link is severed – as it was in the Centrally Planned Economies of the former East – efficiency is severely disturbed.”
And finally: the most fundamental principle of the Rule of Law is that one cannot act as Judge and Jury in one’s own case. This is not a principle that applies on the whole, to international creditors like the British and Dutch governments. Instead they act as Judge and Jury in the case of outstanding debts incurred by private creditors – Landsbanki and Kaupthing Banks – that defaulted on obligations to a small number of British investors, who were then bailed out by British taxpayers. Now the British and Dutch demand that the people of Iceland compensate them in full for these private losses. If effective arbitration had taken place, both the British and Dutch would be obliged to share in the losses – because of their effective endorsement of the reckless behaviour of the above-named private banks….
Its a bad old world in which a wake of Vultures can feed on the distress of sovereign debtors – unfettered by international law.