A wake-up call from Vultures

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.

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11 comments to A wake-up call from Vultures

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  • John Kay’s facts are slightly incorrect. Britain only bailed out the UK banks and the British

    taxpaying citizens who banked offshore with Kaupthing have been left high and dry. Roughly 10,000 British citizens have been left high and dry by

    the UK government who take no responsibility although they had considerable input into the IoM’s financial workings.

  • […] Debtonation » Blog Archive » A wake-up call from Vultures . […]

  • Talton R. Embry

    I am a “predatory” and “invidious” vulture who is usually in complete agreement with your views. However, in this matter, I believe

    that your views are off-the-mark, but, as an economist of great repute and influence, you may redeem yourself and aid the world.
    For too

    long, lending agreements have been chock-a-block with legal mumbo jumbo and rigmarole that are impediments to the smooth functioning of

    governmental bodies throughout the world. You, and other leading economists, should campaign the United Nations, the World Bank, the IMF and the

    BIS to do away the folderal of these instruments. In the future, all governmental contracts should contain plain and simple language to the effect

    that “THIS AGREEMENT IS NOT A CONTRACT AND IS UNENFORCEABLE. IF THE BORROWER WISHES TO PAY MONIES TO THE LENDER, IT WILL. IF THE BORROWER DOES NOT

    WISH TO PAY MONIES TO THE LENDER, IT WILL NOT. UNDER NO CIRCUMSTANCE WILL THE LENDER HAVE ANY LEGAL RIGHT TO THE PAYMENT OF INTEREST OR PRINCIPAL.”

    Plain anguage such as this will completely eliminate the disgusting, distressing and socially unjustifiable problems occasioned by vulture

    activity. I am sure that governmental bodies throughout the world will embrace this plan for openness and transparency.
    In the meantime,

    however, lenders should heed the First Law of Argentinian finance, “A dollar borrowed, is a dollar earned.”

  • ann

    Mr Embry, thank you for your comment. I am not arguing that governments should default on their debts, or that contracts

    should not be honoured.

    I am simply arguing that in the absence of an international legal framework to resolve disputes between debtors and

    creditors – recognising that it takes two to tango – the resolution is often chaotic, unfair and disorderly.

    Hundreds of companies and many

    thousands of individuals default on their debts every day – for good reasons and bad. However the law intervenes to enforce payment, and protect

    the creditor, or allow the debtor to default, and protect the debtor from creditors.

    Bankruptcy law is one of the most civilised of our

    legal institutions – and distinguishes our societies from those Dickensian conditions when people were put in prison for not paying their debts.

    In the absence of such a legal framework, vultures will prevail.

  • A good Greg Palast exposee on vulture funds attacking Liberia on Thursday’s Newsnight. And it may be

    ending happily for once, it appears.

    Will be up on BBC i-player tomorrow, no doubt.

    http://www.gregpalast.com/liberian-leader-urges-

    mps-to-back-action-against-vulture-funds/#more-3319

  • Talton R. Embry

    I am honored to have a response from you. I hope not to try your patience.

    The debtor always chooses the legal venue for

    the resolution of disputes and the framework. The borrower decides on the venue, and the lender either chooses to accept it or declines to lend.

    The debtor also chooses the framework for the resolution of disputes in the terms and conditions which it offers to lenders. Again, lenders can

    either choose to accept these or decline to lend.

    Because the courts of New York and London provide precedence, intelligence and

    honestly, debtors have generally been forced to choose those venues or to refrain from borrowing. They represent the international legal framework

    to resolve disputes, and their honesty is the most important factor in that choice. No lender wants to rely upon the judicial systems of Argentina,

    Ecuador or the Congo.

    Lenders also do not want to depend on a politically staffed and politically motivated supra-

    governmental debt resolution agency. A decade ago, in response to an earlier lending crisis, Anne Krueger of the IMF proposed that an international

    body be established to oversee sovereign restructurings, as you have suggested. The idea has gained very little traction as lenders have very

    little leverage on defaulting sovereigns as it is now. The thrust of her idea was that creditors should be reigned in and their rights diminished

    so that the sovereign borrower can return to health with as little pain as possible. The closing paragraph of her 2001 speech reads; “The political

    imponderable is whether our members are prepared to constrain the ability of their citizens to pursue foreign governments through their national

    courts as an investment in a stable – and therefore more prosperous – world economy.” There are many “investments” that one might make for a better

    world. An involuntary write down on a loan, to the benefit of another county’s politicians and citizens, is not one of them.

    I am

    retired. One of my children asked if I missed working. I told them that dividing profits was fun, allocating losses was hard. My business was in

    the allocation of losses.I was not unhappy to be retired.

    Default for a sovereign should be very hard. It should be difficult and

    painful. It should cause a county’s populace to reject the defaulting government by vote or rebellion. It should strip those responsible of their

    money and their liberty.

    I know little of Iceland. What I do know suggests to me that they should formally default, clean their books

    and go forward. Lenders have short memories. With a few exceptions they appear to be a fine, upstanding and hardworking people who have been badly

    served by their politicians. I would hope that their cleansing process would include massive fines and imprisonment for those responsible for the

    terrible pain that has been caused.

    Has anyone in Iceland paid a price except for the common man?

    If my reading of the

    Iceland situation is correct, the politicians in England and the Netherlands made Icesave depositors whole when there was no legal obligation to do

    so. Accordingly, they bought votes from those they made whole, promoted moral hazard, and subrogated their governments to the depositors claims. As

    was said of taxation, and as you have pointed out; “A burden crushing to the few, is lightly born by the many.” Let England and the Netherlands

    negotiate an appropriate payment from Iceland and the world will go on.

    As to Greece, why does the government permit an underground

    economy of 30% Why is it unable to tax and spend on a reasonable basis?
    Why is it dependent upon the kindness of strangers – not short term, but

    long term. You are railing about Greece’s liquidity problem when it is a solvency problem that has just manifested itself. “How did you go broke?

    Slowly. then all at once.”- that is how confidence works – that is how the market works.

    Sorry for the screed.

  • Rik Hardy

    Thank you all for your comments. I am a Brit who has lived in Iceland for 20 years and, thank heaven, there are plenty of highly

    educated and experienced people with a lot of common sense who understand “our” plight.

    The writer who said that “Default for a sovereign

    should be very hard. It should be difficult and painful. It should cause a county’s populace to reject the defaulting government by vote or

    rebellion.” is quite right – and Iceland did just that.

    The new government now has the appalling task of trying to keep vultures at bay,

    resisting bullying from hypocritical governments, attracting some kind of foreign assistance and rescuing its many ordinary citizens who have been

    betrayed into bankruptcy by what they thought was conventional financial expertise and advice. Those who did the betraying are still at large and

    some are even still in positions where they can continue their betraying. International justice, or even international common sense seem to be in

    amazingly short supply, but your comments show that they do exist.

  • Its a bad old world in which a wake of Vultures can feed on the distress of sovereign debtors – unfettered by international law.

    good counclusion i like it

  • Ann

    thank you badcredithome……

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