Tuesday, 2 August 2011

Vulture Funds - Coming to a Country Near You?

Europe should learn from Argentina's experience of fighting off vultures, before it's too late

Last year we won a campaign against what we call vulture funds - companies that buy up defaulted developing country debt cheaply in order to sue the country concerned for the full value of that debt. These companies have blighted countries like Democratic Republic of Congo, Zambia and Liberia for years, threatening to drain their already depleted treasuries in order to make a substantial profit.

The day before the British Parliament was dissolved for the 2010 election, parliamentarians passed a law that effectively made such activity impossible against low income countries in UK courts - at least on the basis of old debts.

Made permanent two months ago, the law contributed to vulture funds backing off from a case they brought against Liberia in the UK last year. What could have cost Liberia $40million ended up being settled for $3million - good news for one of the most impoverished countries in the world.

The British law against vulture funds is a world first, but it is only one small step towards a more just debt system. As things stand, the law protects up to 40 very poor countries. But dozens more indebted countries from Ecuador and Peru to Vietnam and Tajikistan, not to mention Greece and Portugal, are not protected by the law.

Finance is able to go on profiting from a country's debt crisis. And it's something Europe might need to wake up to pretty soon.

Last month a case against Argentina in a UK court highlighted this need for further change. A vulture fund called NML has been after Argentina for years. NML is a subsidiary of Elliott Associates, a US hedge fund that pioneered 'vulture fund' activity by winning a case against Peru in the 1990s, getting back 400% what they paid for Peru's debt.

Argentina carried out one of the biggest defaults in history back in 2001 when the people of that country decided they'd had enough of implementing IMF policies which were only deepening their crisis. As an aside, activists had been pushing for Argentina to have some of its debt cancelled for many years, regarding it as illegitimate. The country first became indebted under the brutal dictatorship of the late 1970s and early 1980s, a period is known as the 'dirty war' in Argentina, when 30,000 people were 'disappeared' and loans poured into the military, speculation, capital flight and interest payments.

In any case, default was undoubtedly the right thing to do. After several years of stagnation Argentina's economy started growing within a few months.

Even when right, default is never pain-free. Argentina has spent many years convincing its creditors to accept a write down on their debts - essentially accepting they will not get all of their money back, and agreeing to a restructuring under which they will get some of it back.

Vulture funds have prolonged this difficult process significantly. In fact vultures never risked losing out in a default because they only buy debt cheap after a default has already occurred, or at least when it's in sight. They then harass the country concerned to pay up, even while other creditors accept a more reasonable approach.

NML, based in the Cayman Islands, has been harassing Argentina through foreign courts for years. It claims Argentina owes it for bonds which it bought for only half their face value. Last month it won a stage of its case in London, when the UK high court ruled that Argentina's state immunity cannot be used to prevent NML from enforcing previous court judgments against the country.

NML is part of a lobby group called the American Task Force Argentina which is trying to change US law to give more protection to the vultures. Their activities include pressuring the US Government to ensure no World Bank funds are given to Argentina and trying to throw Argentina out of the G20. In other words, they aim to capture US foreign policy in order that this handful of creditors get paid.

Argentina's problems today could well become Europe's problem tomorrow. A recent article claims that hedge funds are buying up Greek debt on the so-called 'secondary debt market'. Just as in the NML case, Greek debt is currently selling for 50 percent of its face value. The vultures could make a lot of money - and if Greece does default as seems almost certain, they will hound the country for years to come.

There are solutions to these practices, but they involve governments taking action which would protect people from the unscrupulous demands of vulture investors. This in turn means challenging the notion that the rights of finance trump the rights of people.

A piece of legislation proposed by Congresswoman Maxine Waters in the US House of Representatives in 2009 would have capped the profits vultures could make on country debt to a certain percentage of what they paid for the debt. This would mean the type of legal activities vultures engage in against Argentina would be unprofitable.

Another solution which has been on the table for many years is the idea of a Debt Court - a neutral body at an international level which could write off debt which is unjustly contracted or is unpayable. Again, such a body would have the effect of making future loans more responsible because of the risk that irresponsible loans will not be paid back.

One way or another we must move the balance against the 'right of finance', towards the right of the people. This has been a serious matter for developing countries for many years. As the European crisis lurches into default, it's time for people in the developed world to make sure their countries' debt does not become rich pickings for the most unscrupulous of companies.

This article first appeared on the Huffington Post UK.

Debt audits and a new economic vision

It will come as no surprise to the hundreds of people gathered for a conference I have just returned from, that Greece’s ‘bailout’ package agreed 12 months ago has failed to provide a solution to the country’s debt problems.

Organised by an unprecedented cross-section of Greek civil society, the international event launched the call for Greece (and now Ireland) to open their debts to the people of those countries for a public discussion as to how just and legitimate those debts really are.

Campaigners from Brazil, Peru, the Philippines, Morocco and Argentina told Greek activists to 'stand on their shoulders’ and not go through 30 years of devastating recession at the behest of international institutions like the International Monetary Fund.

The burgeoning European movement in opposition to debt repayments and austerity is making concrete links with groups from the global south, and it expresses a confidence and rationalism a million miles away from the governments of Greece and Ireland, which have followed policies which are punishing ordinary people in order to repay reckless bankers.

It is simply not possible that the policies being inflicted on Greece, Ireland and now Portugal will reduce the debt burden of those countries – the very opposite will happen, as was seen from Zambia in the 1980s to Argentina at the beginning of the last decade. Similar policies to those being inflicted on Europe saw Zambia’s debt-to-GDP ratio double in the 1980s as the economy shrank. Argentina defaulted on its massive debts in 2001, after a 3-year recession brought about by IMF policies. Like Ireland today Argentina was told it had partied too hard, even though the debt had been run up by a disastrous set of privatisations and a currency peg foisted on the country by the same IMF. Its economy started recovering within a month of the default.

So why are these policies still being pursued? Almost every commentator has known from day one that the ‘bailout’ packages would not make the debts of Greece or Ireland sustainable. But delegates at last weekend’s conference were clear – that isn’t the point. The point is to recover as much of investors’ money as possible, however liable those investors were for the crisis, and transfer liability to society.

Even if Greece and Ireland need additional bailout money or restructuring through some sort of bonds – the same measures imposed on Latin America in the 1980s which created mountains of debt so big that those countries are still suffering the fall-out – the private investors will have been paid out. The argument becomes one between German and Greek populations as to who will foot the biggest portion of the bill, creating a dangerous nationalism already very evident.

European Commissioner for Economic Affairs Olli Rehn has continually told governments that these matters are best kept in the dark – public discussion is strongly discouraged. Those actually paying the price of austerity disagree, and campaigners in Greece and Ireland say the first step in any kind of just solution must be a debt audit – modelled on those carried out in developing countries like Ecuador.

A debt audit would provide people of Europe with the knowledge on which to base truly democratic decisions. As Sofia Sakorafa, the Greek MP who refused to sign the bailout terms and walked out of the governing party PASOK, put it at the conference ‘the answer to tyranny, oppression, violence and abuse is knowledge’. Andy Storey from Irish group Afri echoed this, saying the purpose of an audit is to ‘remove the mask of the financial system which controls our economy’.

The results of an audit can be rapid and concrete. Maria Lucia Fattorelli from Brazil is a veteran of debt audits, and helped Ecuadorian groups conduct an audit endorsed by President Correa in 2008. The Economist called Correa ‘incorruptible’ when public spending rose, after his successful default on bonds following the audit. Taking action now could mean saving European countries from the three decades of stunted development experienced by Latin American countries.

But the activists gathered this weekend believed that a debt audit can be the start of something even more fundamental, a new way of thinking about economics. As Sakorafa put it, an audit is the start of regaining values and vision to show ‘beyond speculating market games, there are more valuable concepts; there are people, there is history, there is culture, there is decency’.

Such a rejuvenation of political vision is vital if the crisis is not to cause impoverishment and spur inter-European hostility. On Sunday Irish economist Morgan Kelly said his country was heading for bankruptcy. A secret meeting of European leaders on Friday night came to the same conclusion about Greece, a country we are told is losing 1,000 jobs a day and where the suicide rate has doubled. Portugal’s €78 billion ‘bailout’ package, which is dependent on a freeze in civil service pay and pensions and reduced compensation to laid off workers, and cuts unemployment benefits at exactly the time unemployment figures are reaching record levels, will have a similar impact. Everywhere emigrants are streaming out of these countries in search of better prospects.

No amount of compensation will repair the damage these policies will wreak on society - as delegates across the developing world testified too. There is no reason for Europe to wait 30 years to learn this lesson. A European and international movement must make up for the poverty of our leader’s vision. Such a movement feels like it may have been born in Athens.

This article appeared in Red Pepper.

Free trade is not what Africa needs, Mr Cameron

African prosperity relies on a wholesale rejection of the western free trade model, which is unlikely to be the view of David Cameron or the delegates he's travelling with in Africa

On his trip to South Africa yesterday, David Cameron talked of the need to go beyond debt cancellation and aid "to make African free trade the common purpose of the continent". He lamented there has never once been "a march or a concert to call for … an African free trade area". He pointed to the need for more inter-African trade to facilitate the growth that would mean "businesses growing, new jobs on offer, families on the up, living standards transformed".

Cameron's vision is far from "fresh", and is certainly not a radical extension of the anti-poverty agenda that led to a movement of millions of people calling for debt justice and the meeting of long overdue aid commitments. He repeats an orthodoxy that says the interests of the corporate delegates accompanying Cameron are the same as the interests of ordinary people across the African continent. Nearly three years into a global crisis caused by unbridled financial freedom, this orthodoxy should be consigned to the dustbin of history.

In 2003, Cameron would have been one of the MPs lobbied by 10,000 trade justice campaigners, while in 2005 he can hardly fail to remember the 250,000 people gathered in Edinburgh making the same demand. The debt and trade justice movements have never been simply arguments for more aid, but for a radical restructuring of the global economy and financial sector. They are all about enabling Africa to use its own resources for its own benefit – to genuinely enable countries to outgrow aid dependence.

The problem is that this agenda doesn't fit with Cameron's "free trade" ideology, or the interests of his delegation, which includes companies such as Barclays, G4S, Vodafone, Diageo and PricewaterhouseCoopers. So the premise of Cameron's article is to make it appear that there is only one possible way forward – free trade – and all right-thinking people who care about poverty and inequality must support this agenda.

But trade on the wrong terms has been of no benefit to Africa – rather it has ripped open markets, destroyed infant industries, undermined control of food production, and exploited resources. It is the opposite of what Africa needs.

Multinational companies operating in Africa are nothing new. According to Global Financial Integrity, between 1970 and 2008, Africa lost $850bn to $1.8tn in "illicit financial outflows", most importantly forgone tax paid by corporations. Such a loss of capital led to the need for countries to borrow, in turn leading to a debt crisis during which capital poured out of the continent and into the coffers of rich countries.

Today, the debt of sub-Saharan Africa still stands at nearly $200bn. Aid now accounts for $47bn, though debt repayments still cost $18bn every year, while much of the aid itself comes in the form of new loans or is simply handed to western corporations working in the country concerned.

Cameron says economic growth "will lift tens of millions out of poverty in the long run" but, again, it depends what sort of growth. Growth in recent years, in an environment where corporations are increasingly free to go where they like when they like, has become ever less effective at fighting poverty, and has made the world much less equal. The New Economics Foundation has shown that in the 1990s, for every $100 worth of growth in the world's income per person, just $0.60 contributed to reducing poverty for those living on less than a dollar a day.

Cameron is right that the idea of more inter-African trade is vitally important. But for years, inter-African trade has been discouraged by rich countries and a global trading system that uses Africa as a source of primary commodities for growth elsewhere. For example, European Union attempts to foist Economic Partnership Agreements on African countries give preferential access to European companies, thereby thwarting African attempts at integration. There are clear reasons why "for much of the continent it is easier to trade with Europe or America than it is to trade with a neighbour", and it has little to do with "red tape".

Africa has much to learn from South Korea, the model Cameron rather surprisingly raises. South Korea used a range of government interventions that are heretical in the free trade religion.

African prosperity relies on a wholesale rejection of the western "free trade" model. It means protecting industries, developing alternative and complementary means of trading, control of food production and banking, progressive tax structures, controlled use of savings, and strong regulation to ensure trade and investment really benefits people. This is unlikely to be the view of most of Cameron's corporate partners – if it was we would never have needed to march for justice in the first place.

This article appeared on the Guardian.