Opinion | Columnists
Vulture funds not illegal but immoral
Buying distressed debts, especially those of a Third World country, is very questionable.
- Gulf News
- Published: 00:00 February 17, 2007
A UK High Court judge has ruled that Zambia will have to pay a significant part of a nearly 30-year debt to what is termed a "vulture fund".
The purchasing of distressed debts has been common in industry for some time and there is nothing illegal in the practice. It is where the lender will sell off the debt cheaply, usually to a financial organisation, so that some recovery of the debt is made.
But the purchaser will then set about exploiting the debt to the fullest. This may mean reorganising a company, or, as in the case with Zambia, requesting the debt be made good.
In 1979, Romania lent Zambia some $15 million to buy Romanian tractors. Over the course of time, Zambia reneged on the repayments and eventually the outstanding was renegotiated to some $3 million.
But then a company, Donegal International, stepped in and purchased the bad debt for what is believed to be just under $4 million. Donegal then demanded repayment of the full amount due, plus interests and costs, which amount to $42 million.
Zambia was left with no alternative but to sue Donegal, which it has done, only to obtain a mixed verdict. It is believed the judge will advise Zambia to pay about half the amount claimed when he announces his full findings.
While it is true to say that what Donegal has done is not illegal, it is very questionable if not immoral. Certainly it is perverse, for it goes against the very intent of campaigners and some governments to write off debts to Third World countries.
If greedy financial corporations are prepared to step in and take over from where governments have left off in regard to seeking retribution of outstanding debt, then there is little purpose encouraging rich nations to increase their forgiveness in the first place.
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