Monday, 24 August 2009

Iceland proves that the debtor has rights too

Recent events in Iceland may have completed that country's transformation from free market, credit-fuelled billionaire playground to champion underdog. The Icelandic Parliament’s offer to the UK and Dutch governments earlier this week that it will pay back its debts but only at a level it can afford, could provide an invaluable model for how indebted nations can start putting the needs of their people ahead of the desires of the global financial markets.

Iceland has become synonymous with the financial crisis after nearly a decade of drinking neo-liberal kool aid. Around 2000 Iceland went on a deregulation and privatisation binge, totally reforming its financial sector, dropping bank reserve requirements, raising interest rates sharply, sucking in foreign capital and encouraging massive borrowing. It lived the dream being promoted by most European capitals at the time. So many millionaires flew into tiny Rejavik that a local politician demanded limitations on planes coming into the country.

Such a highly indebted financial system was, unsurprisingly, an early victim of the credit crunch, even though Iceland was not invested in sub-prime loans. Their situation was certainly not helped by Gordon Brown – proponent of the very policies Iceland had slavishly followed – who designated the country a terrorist state last October in order to seize Iceland’s banking assets in the UK. His attempt to derive popularity amongst investors at home neatly side-stepped the failure of UK authorities to adequately regulate UK investment.

The enormous anger that followed in Iceland toppled the government, and since then has radically reduced support in Iceland for the country’s membership of the EU. Most recently ordinary citizens have pushed members of the ruling coalition and opposition parties into opposing the enormous repayments being demanded by the British and Dutch governments.

That is the background to the decision earlier in the week of the Icelandic Parliament – the Althing –that it would repay its debts, but only at a rate it could afford. That is defined as spending no more than 4% growth in GDP to repay UK debts (and 2% for Dutch debts). If the economy doesn’t grow (because of inappropriate conditions forced on the country by creditors for example) Iceland pays nothing.

This decision, if implemented, is historical. Michael Hudson, Professor of Economics at the University of Missouri, has said that it is the first agreement “since the 1920s to subordinate foreign debt to the country’s ability to pay”. Hudson is referring to the 1920s debate that raged over capping Germany’s First World War reparations repayments. Keynes argued at the time that insisting on debt repayments beyond a level which also allowed the country to grow would inevitably mean forcing Germany to sell its assets or alternatively to borrow more money. He predicted the subsequent anger and discontent caused in Germany, which led straight into World War II.

But the situation which Iceland is trying to deal with is one which has faced scores of developing countries for decades – countries with less responsibility for the current mess than Iceland. Many countries still have to pay unreasonable levels of debt by selling off assets, skewing their economy towards unsustainable export trade and foregoing their right to development.

Iceland is correct to assert that states in debt have rights that trump the rights of creditors to bleed their economies dry. When companies and municipalities become insolvent, they are protected by work-out laws – but no such work-out mechanism exists when it comes to countries.

If limiting Iceland’s debt repayments is right, the same must apply, to an even greater extent, to poorer countries. Lebanon spends over 50% of government expenditure in servicing debts, Uruguay 32% and the Philippines 31%. These states top a much longer list of developing countries who understand from experience the injustice of indebtedness better than any European government.

Iceland has led the way in standing up for the rights of debtors. It may be followed by a range of indebted Eastern European countries who are also currently having their economic policies dictated to them by the International Monetary Fund.

This article was first published in the Morning Star.

Sunday, 2 August 2009

Vultures who scavenge off the living

The financial sector may be low on fans in the current climate, but even at a party of bank managers, vulture funds would probably find themselves standing alone by the canapes.

Vulture funds - otherwise known as distressed debt funds - feed off the very poorest. Usually based in tax havens, these funds buy up developing country debts for a fraction of their real value and then sue the country in question for full immediate repayment, making massive profits in the process.

Unsurprisingly, companies suing developing countries often find themselves popular targets for Western campaigners.

In 2003, owner of Iceland supermarkets The Big Food Group was suing Guyana for over £12 million but dropped the case after an outcry from debt campaigners. In December 2002, Nestle dropped a similar claim of $6m (£3.6m) against Ethiopia.

But vultures are less well-known than Iceland or Nestle. As a result, so are the cases that they fight and - all too often - win. Even more shocking is the fact that well over half of these cases are fought in US or British courts.

Vultures were seen in action in 1997 when a company called Donegal, a vulture registered in the British Virgin Islands, sued Zambia in the High Court for $55m (£33m) on a debt it had bought for $3m (£1.8m).

This debt was generated as far back as 1979, when Zambia was lent $15m (£8.9m) by Romania in order to buy Romanian tractors and other farming machinery. Twenty years later, Zambia was unable to repay its debts and became eligible for debt relief. The Zambian and Romanian governments were negotiating the cancellation of the tractor debt as part of this process.

Enter Donegal International, a fund set up purely to purchase this debt and run by US businessman Michael Sheehan - otherwise known as "Goldfinger."

Donegal was able to purchase the debt from Romania for $3.3m (£1.9m) and then sue Zambia in British courts for the full $55m - eventually winning $15m (£8.9m) in 2007.

In essence, some of the recent debt relief that Zambia had been given by countries like Britain was snatched back by a vulture fund.

Zambia is far from alone. The International Monetary Fund claims that at least 54 companies have taken legal action against 12 of the world's poorest countries, for claims amounting to $1.5 billion (£900m).

Vulture action is ongoing against Ethiopia, Cameroon, the Democratic Republic of Congo and others.

A company called FG Hemisphere has been awarded $100 million (£59.8m) against the Democratic Republic of Congo and is now seeking the money in jurisdictions including Hong Kong, South Africa and the US.

The company recently won a court order in the US for fines of up to $80,000 (£47,860) a week against the war-torn DRC after it failed to disclose all of its assets across the world.

And even this isn't the whole picture. It doesn't include, for instance, "less poor" countries such as Argentina, which is facing a case brought by a vulture fund called NML.

NML bought Argentinian bonds that were defaulted on during the country's 2001 financial meltdown. It is currently using British courts to try to recover payment against assets that Argentina might have in Britain.

So it was particularly good news when the British government announced its intention last week to prevent these funds - in effect - from using British courts. The government's proposal is to apply the same terms to vulture-fund cases as are applied to all other creditors of countries deemed eligible for debt relief. So when cases come up before British courts, a large proportion of debt relief would be deducted from the total figure of the debt they seek to reclaim and vulture activity would become pointless.

Even better, in the US, Democrat Congresswoman Maxine Waters is leading the charge to ensure that vultures cannot use US courts to "profiteer," which is defined as making more than 6 per cent interest on any debt that is bought.

So this could be the end of the road for the vultures. It will certainly put a deep hole in their profits. But the case hasn't been won yet.

The government's consultation is open until October 8, and heavy lobbying can be expected from some in the financial sector. Moreover, the government's proposal only covers very poor countries which are eligible for debt relief.

The legislation will not come a moment too soon. As more and more countries fall into debt and the economic crisis worsens, vulture funds might seem like a recession-proof career.

"Vulture" is actually a somewhat favourable term for companies that scavenge not off the dead but the living. Closing them down is one small step towards combating the secrecy and irresponsibility of the financial system as a whole.

This article first appeared in the Morning Star.