When London's high court instructed Zambia, an indebted impoverished country, to pay a Washington-based "vulture" fund $15.5m on 24 April, it revealed the disjointed nature of debt relief.
The court first ruled in favour of Donegal International last February. If the full $55m claimed by the finance company had been awarded by the court it would have wiped out the $40m accrued by Zambia through debt relief last year.
"That is not what it was intended to do . . . It is absolutely disgraceful," said Trisha Rogers of the Jubilee Debt Campaign.
Vulture funds are so-called because they buy securities at greatly discounted prices in highly distressed commercial, personal or sovereign debt markets. They have no intention of carrying on as lenders, but are simply looking for short-term profit.
They are not concerned with the commercial viability of the debt, because they purchase as liquidators. As long as the company, person or country has some asset that can be sold to cover their "investment" costs, vulture funds will pursue their legal rights to force a sale and recover the loan plus interest.
Litigation is the key weapon in the "success" of any vulture fund.
When Justice Andrew Smith made his decision last February, he made it clear that it was purely on legal not moral arguments. "I am concerned with the legal questions that are raised by the application before me and not with questions of morality or humanity."
This is not the first time around for Zambia. In 1997, Camdex International sued the Bank of Zambia for $120m for non-payment on a $50m loan from the Central Bank of Kuwait, which it bought in 1995. Lord Justice Hobhouse sided with Camdex, because of the undisputed nature of the debt, but added that he felt Camdex's "trafficking in litigation" was objectionable.
The UK and US have laws in place that should prevent companies from "trafficking in litigation", but they are vague and rarely stand up in court. The fact is that there is no supra-national law that gives bankrupt countries the same protection as domestic bankruptcy laws. Anne Krueger, deputy managing director of the International Monetary Fund, tried to introduce a Sovereign Debt Restructuring Mechanism (SDRM) in 2001 which, in short, would have protected countries from legal action from minority creditors such as Donegal while restructuring took place. It would force such creditors to adhere to the deal accepted by the majority, and limit profiting from debt relief.
According to Krueger, the US Treasury killed the SDRM because of opposition from major banks and organisations such as the Institute of International Finance. The banks opposed the SDRM because they felt it would reduce liquidity in the secondary-debt markets. Moreover, emerging economies felt it would make development financing more expensive, because, as Krueger suggests, "actions that can be taken to stop the bad flow may stop more of the good flow as well".
So the SDRM failed, but a way of dealing with international bankruptcies is still desperately needed, especially for Africa, where alternatives to traditional international financing mechanisms, such as the Paris Club, are rapidly emerging. In 2006, the World Bank warned that new creditors in Africa such as China, India, Brazil, Saudi Arabia and Kuwait "have non-traditional financial structures" that make it hard to assess debt sustainability. Rogers believes the international community has to work on a compulsory commercial debt buy-back mechanism or establish a charter of responsible lending to prevent another debt crisis.
On this, the Jubilee Debt Campaign is in agreement with World Bank president Paul Wolfowitz. He has called for "effective legal remedies that protect countries like Zambia from that kind of unfair dealing".
