Sometimes the finance industry’s lack of morals is truly breathtaking. Yesterday in Parliament politicians tried to address secretive investment funds which are making money out of debt relief for some of the poorest countries in the world. Market practitioners prefer to refer to them as distressed debt or special situations funds; others call them ‘vulture funds’.
The idea is simple. You purchase the debts of poor countries at a sizeable discount. Then you wait until the governments of those countries get a bit of money – say from debt relief from foreign creditors. Then you sue the country for repayment in full at exorbitant rates of interest. Simply put money which should be going into poverty relief and education ends up in the pockets of fund managers – usually in offshore banks. You can read more about the shabby tale here.) Their behaviour has been described as ‘extortion’ by Hans Humes, owner of New York’s Greylock Capital.
These fund managers are really just loan sharks, operating at a higher level. They are the Great Whites of the loan shark world. They are profiteering from the misery of the poor countries and the generosity of taxpayers whose governments have given debt relief.
The idea behind this bill is not that countries shouldn’t pay their debts, but that they should not have to repay beyond a fair and sustainable level. Take the case of Liberia. Two commercial creditors took a case to the UK High Court last year for a debt dating back to the 1970s on an original loan worth six million dollars and were awarded 18 million dollars – or 5% of the country’s entire annual budget. The week they filed their suit against Liberia, the Liberian capital was under siege from rebels, and had no electricity, water or a functioning government.
But then sharks always work best when they can scent blood.